Economic Insider

Pakistan: IMF stalls bailout discussion


Image Source: Online Khabar

Pakistan and the IMF failed to secure an agreement at the last minute that would have provided the government with access to $1.1 billion in loans, preventing the country from going bankrupt.

Pakistan’s foreign exchange reserves are nearly depleted as the country’s economic position worsens. As a result, there is only enough money to finance a month’s worth of imports, and the government requires assistance in repaying its substantial foreign debt.

The IMF mission will depart Islamabad on Friday, reporting “substantial progress” after ten days of talks.

According to the leader of the IMF team, virtual negotiations will continue for the next three days.

In Pakistan, annual inflation reached more than 27% in January, the highest level since 1975, raising economic concerns in this key election year.

This week, the rupee dropped to an all-time low of 275 to a dollar, down from 175 a year earlier. This raises the cost of purchasing and paying for items in Pakistan.

One of Pakistan’s most serious challenges is the country’s need for foreign currency.

Faisalabad, Pakistan’s industrial heartland, where Jubilee Textiles is based, has closed. However, this was due to a cash shortage rather than the frequent power outages that plagued Pakistan for years.

After being switched off for a month, Jubilee’s printing machines were reopened. So there were mounds of white cotton sheets in iron tubs with a thin layer of brick dust on top when the BBC came. A drip, drip from an industrial washer was the only sound.

Fahim said as he walked through the network of frozen machines that the company had run out of the dyes it had purchased from China, not because they were unavailable, but because their bank stated that clearing the funds to pay for them would take weeks.

Analysts believe that the government intentionally raised the bank’s exchange rate behind the scenes, making it impossible for dollars to enter the system. They allowed it to decline at the end of last month, which may have allowed some businesses to hike their pricing.

Businesses and industries in Pakistan reported having to close or cease operations due to a backlog of imported goods at ports.

At the end of January, a government official told the BBC that over 8,000 containers were stacking up in Karachi’s two ports. These containers housed medications and food. According to local media, some of it has begun to move, but much remains motionless.

a bunch of problems at once

Like many other countries, Pakistan is suffering due to the coronavirus pandemic and Russia’s invasion of Ukraine, which is driving up global oil costs. As a result, Pakistan imports many fossil fuels, and the cost of food imports has soared.

When the rupee falls in value, gasoline prices rise, influencing how goods are transported or manufactured. The administration increased fuel prices by more than 13% but has no plans to hike them higher.

Add to it the devastation caused by the floods last year, which the UN estimates cost more than $16 billion. Flooding devastated large sections of Pakistan, devastating farmland and making food production difficult. Wheat and onion prices have skyrocketed as a result.

All of this is happening when politics is volatile and unpredictable, and a vote is due at the end of the year.

Pakistan is no stranger to bailouts, either. For a long period, the government has attempted to wean itself off populist subsidies while stabilizing the economy. Nonetheless, due to its massive military budget and substantial infrastructure spending throughout the years, it has been unable to do so.

Is Pakistan following the path of Sri Lanka?

Imran Khan, deposed as Prime Minister of Pakistan in April 2017, returned to power in 2018 with the promise of reviving the country’s economy. Instead, he announced that he would not seek IMF aid, but inflation soared, and the currency collapsed.

Finally, he agreed to a $6 billion emergency package with the IMF to handle the country’s balance of payments crisis.

Discussions about the next $1.1 billion have been stuck for a long time. It was intended to be finished in November.

Both the government and Mr. Khan’s PTI have previously argued with the IMF, but with the country’s low foreign reserves, both sides agree that Pakistan must accept the money.

The discussions, according to Pakistan, have been contentious. Last Thursday, Prime Minister Shehbaz Sharif indicated that the organization was critical of Pakistan’s finance minister.

In an interview last month, Mr. Khan indicated that Pakistan might end up like Sri Lanka, which ran out of money last year and couldn’t buy food, fuel, or other necessities, spurring a popular movement that led to the president’s ouster.

Dr. Javed is different from the others. However, he is concerned about a few issues.

Mr. Khan’s party, the PTI, and the administration get along well. Mr. Khan, on the other hand, has a significant following and has held protests and marches to claim that his dismissal from the government was illegitimate.

The new government in Pakistan has declared that it will not comply with its wish for early elections to focus on the economy.

Both sides agree on one point: economic stability is easier to sustain when there is political certainty, which is unlikely to occur when an election is coming.

For the time being, the IMF is in charge of the situation.

So, will Pakistan’s standing improve? The government requires additional finances as soon as possible to keep the lights on, among other things.

When the weather heats and more people need electricity to operate fans and air conditioners, the energy will climb. This will place more burden on the system and Pakistan’s almost depleted foreign reserves.

Read Also: Pakistan seeks IMF’s assistance

The question is how long this bailout package will persist.

Mr. Hussain believes negotiating a deal with the IMF will benefit the economy and country while damaging ordinary individuals. The most significant risk, he argues, is that the government will agree with the IMF, begin executing the measures, and then reverse its position.

Opinions expressed by Economic Insider contributors are their own.


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