Pakistan has received approval for a $3 billion Stand-By Arrangement (SBA) from the International Monetary Fund (IMF) board. This short-term financial assistance is crucial for stabilizing the economy and averting a potential default. However, it is unlikely to generate enough room for social and development spending to benefit the people of Pakistan within the next nine months.

The approval of the IMF bailout is undeniably important for Pakistan’s struggling economy, but it should not be exaggerated in terms of its significance. The impact of the approval by the IMF board has had positive effects on the economy. Concerns about a possible sovereign default by the end of 2023 have diminished, and Pakistan’s dollar bonds have experienced a rapid rally since the initial agreement on June 29. The Pakistani rupee has also strengthened against the dollar, leading to a jubilant stock market. Furthermore, Fitch has upgraded Pakistan’s credit rating by one point, and Saudi Arabia and the United Arab Emirates have deposited the promised $2 billion and $1 billion, respectively, to bolster the State Bank of Pakistan’s foreign exchange reserves.

The government is presenting these developments as signs of economic recovery and claims that the “hard times” are over. While it may be true that immediate hardships have subsided, the bailout does not mark the end of Pakistan’s economic challenges. It only provides a few stable months to conduct elections and service external debts over the next six months, without addressing fundamental issues such as insufficient tax revenues, low exports, import-driven consumption, and other economic problems.

The press release issued by the IMF highlights three key points. However, the objectives of the SBA, as stated by the IMF, seem exaggerated considering the current state of Pakistan’s economy and the nine-month duration of the programme. The revised budget, a prerequisite for the SBA, anticipates an increase in budgeted revenue from Rs9.2 trillion to Rs9.4 trillion. The initial revenue target was based on a GDP growth projection of 3.5%, which the IMF downgraded to 2.5 percent. This adjustment was made after revising the government’s claim of 0.3% growth in the previous fiscal year to a negative 0.5%. The budget also accounted for an 8.9% increase in import growth in dollar terms, leading to the State Bank’s removal of administrative restrictions on June 23. However, the implementation of these measures is hindered by a lack of foreign exchange reserves. Despite claiming an Rs85 billion reduction in current expenditure in the revised budget, the Finance Division reports an increase from Rs13.319 trillion to Rs13.344 trillion.

The allocation of an additional Rs13.8 billion for social protection in the revised budget is unlikely to sufficiently support the growing number of individuals falling below the poverty line due to SBA conditions such as rising utility rates and the petroleum levy. Moreover, the budget for the Benazir Income Support Programme has been raised from Rs450 billion to Rs466 billion. Another increase in the discount rate, as emphasized in the IMF press release, aimed at maintaining tight monetary policy for disinflation purposes, may raise the government’s borrowing costs. Given that the government is the largest borrower in the market and private sector credit has contracted by over 80% compared to the previous fiscal year, a higher budget deficit could lead to increased inflation.

The second point in the IMF press release reiterates serious concerns about the implementation of flawed policies or missteps, as previously mentioned by the IMF dating back to September-October 2022. It emphasizes the criticality of steadfast policy implementation for Pakistan, including the need for greater fiscal discipline (implicitly referencing the Rs110 billion subsidy to exporters announced on October 6th last year) and a market-determined exchange rate to absorb external pressures that had adversely affected official remittance inflows, estimated at around $4 billion last year.

The IMF also highlights the importance of progress in reforms in the energy sector, with a focus on long-term solutions to address poor governance rather than burdening consumers. Climate resilience is also emphasized, although the budget allocation for the climate change division this year is Rs4,050 million compared to the revised estimate of Rs4,073 million last year. Additionally, a high policy rate and a depreciating rupee value against the dollar are likely to continue hampering the business climate.

While the approval of the IMF bailout provides a lifeline to Pakistan’s economy, achieving the stated objectives remains challenging. Implementing the necessary reforms is crucial for sustained progress and addressing the underlying structural issues to ensure long-term stability and growth.

An unprecedented aspect of the press release is a lengthy statement by the IMF Managing Director, appreciating the implementation of all previous conditions. It should be noted that the SBA would not have been approved without the implementation of these conditions. The statement also emphasizes the urgency of accelerating structural reforms, which can be interpreted as a warning. Failure to undertake these politically challenging reform measures may result in default and the inability to access external borrowing from friendly nations, multilateral institutions, bilateral sources, foreign commercial banks, or issue debt equity.

It is concerning that Pakistan has been the most frequent recipient of IMF bailouts, with a total of 23 in the past. This trend is likely to continue in the coming years, even if policymakers immediately begin addressing the structural issues plaguing the economy that repeatedly push the country to the brink and necessitate IMF assistance every few years.

Nevertheless, if Pakistan utilizes the IMF bailout as an opportunity to implement comprehensive reforms for long-term debt sustainability and growth, it can help regain stability.