Pakistan is desperately looking for the International Monetary Fund to release the next instalment of its bailout loan worth US$1.1 billion, while the duration of the extended loan programme ends on Friday. The IMF had approved Pakistan’s 21st loan on July 3, 2019.
The loan, which is to be given in instalments with four quarterly and four semi-annual reviews, was tied to the norms set by the international lender on speeding up economic reforms in the country. Extended over 39 months, with a deadline of October 2, 2022, about US$6-billion loan was approved for Pakistan under the extended fund facility (EFF). The deadline was later extended to June 30.
The IMF Executive Board had approved a loan amount that was 210 percent of Pakistan’s loan withdrawing capacity. The IMF loan approval was expected to help the country get US$38 billion more from other international agencies and partners with its phase-wise successful implementation. As an immediate disbursal, US$1 billion was released.
The EFF loans are to support the economic crisis that Pakistan is currently facing. They are disbursed “when a country faces serious medium-term balance of payment problems because of structural weaknesses that require time to address”. The EFF assistance is for longer programme engagement, to help countries implement medium-term structural reforms, and come up with a longer repayment period.
An IMF bailout loan puts up specific conditions: strong structural reforms to address macroeconomic fundamentals like income, revenue, tax base and free market penetration are a must; policy reforms to address institutional or economic weaknesses must be introduced; and the global funding agency has been categorical in asking Pakistan to trim its defence budget.
Till August 2022, Pakistan was getting loan instalments as it could meet with the norms set up by the IMF but after that, as its economy nosedived due to impact from Covid and then the Ukraine war coupled with a political crisis after Imran Khan’s ouster as prime minister, most of the agreements were compromised.
The ruling political class was in a dilemma to put additional tax measures and increase prices when elections in the country were just a year away. Also, cuts in defence expenditure were ruled out.
The bailout reviews
The first review meeting by the IMF board was completed on December 19, 2019. It appreciated Pakistan’s efforts and said the economic reform programme was on track. With a positive review, about US$452.4 million of the bailout loan was released immediately, taking the total disbursement to US$1.452 billion.
The next review meetings were delayed due to Covid and to speed up things, the second, third, fourth and fifth reviews were combined and completed on March 24, 2021. Pakistan’s efforts were once again appreciated. The review outcome said the “program performance had remained satisfactory notwithstanding the unprecedented challenges of the Covid-19 shock”. The IMF Executive Board allowed Pakistan immediate loan instalment of US$500 million for budget support. Now, out of a total US$6 billion loan, Pakistan had already received US$1.952 billion.
Before the sixth review meeting, Pakistan sought more time to implement IMF conditions, so the January 2022 meeting was pushed and finally completed on February 2, 2022. According to the review outcome, though Pakistan’s economic activity rebounded after the Covid-19 pandemic, troubling signs started emerging.
“Pressures have started to build, as being reflected in a widening current account deficit and rising inflationary pressures,” said the IMF Executive Board press communique. To overcome it, the board suggested “further ambitious efforts to remove structural impediments and facilitate the structural transformation of the economy”. After the review, about US$1 billion of the loan instalment was released immediately, taking the total loan disbursement of US$2.952 billion.
A combined seventh and eighth review meeting was completed on August 29, 2022. The IMF released a loan instalment of US$1.1 billion but with words of caution. The Pakistani rupee and foreign reserves were under significant pressure and the country needed more resilient and strict economic measures post Covid and the Ukraine war.
The agency suggested Pakistan should follow proactive and prudent monetary policy by sticking to a market-determined exchange rate. The country was asked to accelerate structural reforms, streamline its governance, and improve productivity of state-owned enterprises.
Also, the deadline, as requested by Pakistan was extended to June 30, 2023, with more review meetings added. The bailout loan amount was also increased by US$500 million to US$6.5 billion. After the seventh and and eighth reviews, Pakistan had received US$3.952 billion while the rest US$2.548 billion was to be received after the ninth, 10th and 11th reviews.
Dead end?
Due to its internal conditions, Pakistan failed to act on the IMF norms, delaying the ninth review meeting and the US$1.1 billion loan instalment attached with it. The meeting has been pending since November 2022 and so is the loan instalment. Also, the IMF calendar has no Pakistan agenda for this month.
Pakistan has always said it had met the norms set by the IMF but the agency rejected it every time after August 2022. Earlier this month, Pakistan released its FY24 budget that the IMF called a missed opportunity. It said any agreement was expected only after reviving the budget. After some tough and harsh stances by IMF officials, Pakistan’s government was forced to bring in amendments to meet the riders to increase the tax revenue base in the country.
Now, as the bailout loan deadline ends on Friday, will Pakistan lock the lifeline of US$2.548 billion that it needs desperately? Or will it face the problem of an economic default once the loan deal is dead? An IMF loan failure means other multilateral agencies and countries may avoid giving loans to Pakistan in future.
Or will the IMF take a lenient approach by agreeing with Pakistan’s budget revival steps and releasing the loan instalment by tomorrow as expected? Or will the agency extend the bailout loan programme deadline further for the ninth, 10th and 11th review meetings?
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