A recent International Monetary Fund (IMF) report on Pakistan’s new $3 billion short-term bailout loan has brought to light a harsh evaluation of the economic and financial policies implemented by the coalition government. The report highlights how the policies have deepened the trust gap between Islamabad and the lender, pushing the nation perilously close to the precipice in the last nine months. From policy missteps to fiscal discipline, the report scrutinizes various aspects that have led to the current state of affairs.

The IMF staff report points to a series of policy missteps and breaches of the previous Extended Fund Facility programme, which forced the lender to suspend fund disbursement and close the door on other sources of multilateral and bilateral financing. The IMF document outlines the programme’s objectives, some of which, such as increasing energy prices, will directly burden the people. The report blames the finance ministry and State Bank of Pakistan for frequently tampering with the market-based exchange rate mechanism, resulting in the growth of a large foreign exchange black market. The central bank was also criticized for resisting timely interest rate increases.

Furthermore, the government’s failure to maintain fiscal discipline, cut non-essential spending, broaden the tax net, address power sector circular debt drivers, and improve State-Owned Enterprise (SOE) governance were also highlighted in the report. Given the IMF’s experience with Pakistani authorities, the report warns that the continuation of the new programme depends on certain conditions. These conditions include implementing fiscal discipline, returning to a market-determined exchange rate and proper functioning of the foreign exchange market, adopting a tight monetary policy to combat inflation, and making progress on structural reforms, particularly in the energy sector, SOEs, and climate resilience.

The report cautions against “exceptionally high” downside risks to the Stand-by Arrangement (SBA) goals stemming from a tense political environment and potential deviations from agreed policies. Such risks could impede the program’s implementation, jeopardize macro-financial and external stability, and challenge debt sustainability, ultimately leading Pakistan to seek foreign debt restructuring.

Moreover, the report highlights the persistently high external financing risks, and any delays in receiving external financing from international financial institutions (IFIs) and bilateral creditors could further strain the fragile external balance due to limited buffers. The ongoing spillovers from Russia’s invasion of Ukraine, resulting in high food and fuel prices and tighter global financial conditions, continue to exert pressure on Pakistan’s budget. Emphasizing Pakistan’s substantial gross financing needs of $28.3 billion, including a $6.4 billion current account deficit during the fiscal year, the report underscores the critical importance of ongoing multilateral and bilateral support for Pakistan beyond the upcoming elections and the SBA.

Looking ahead, it is almost certain that the next government will require another longer-term IMF programme to address structural challenges and meet significant external debt obligations in the coming years. To achieve this, the country must diligently work towards fulfilling the goals of the SBA, regardless of the challenges that may arise.

The IMF has highlighted that Pakistan is facing complex and multifaceted economic challenges, with exceptionally high risks. Over the past year, the country has been hit by significant shocks, including floods that caused damages of more than $30 billion, the war in Ukraine, and other fiscal and external pressures. These events have severely impacted Pakistan’s economy, leading to a balance of payment crisis, depleting foreign reserves, mounting debt, and record-breaking inflation.

To address these challenges, the IMF has approved a $3 billion bailout programme to stabilize Pakistan’s economy. The immediate disbursal of about $1.2 billion is aimed at providing urgent financial support to the country. However, the bailout comes with stringent conditions, including the implementation of market-determined exchange rates for the Pakistani rupee, increased energy tariffs, and reforms in the energy sector. The government has also committed not to introduce new tax amnesty schemes or grant tax exemptions during the current fiscal year.

The IMF emphasizes the importance of steadfastly implementing agreed policies and continued financial support from external partners to mitigate risks and maintain macroeconomic stability. It is crucial for Pakistan to adhere to the terms of the program agreements to improve the economic situation and reduce vulnerabilities.

Furthermore, the report suggests that resolving Pakistan’s structural challenges, including long-term balance of payment pressures, will require ongoing adjustments and creditor support even beyond the programme period. A possible successor arrangement could be considered with the government after the current bailout program is completed. This potential successor arrangement would aim to anchor policy adjustments necessary to restore Pakistan’s medium-term viability and its capacity to repay its debts.

The political turmoil in the country adds to the financial difficulties as national elections are expected to take place this year. Political stability is crucial for effective economic management and attracting investor confidence.

Pakistan faces a daunting economic situation, and the challenges require comprehensive and sustainable solutions. The IMF’s bailout provides a lifeline, but its successful implementation is vital. Long-term reforms and continued international support will be necessary to address structural issues and pave the way for economic stability and growth in Pakistan.

In light of the IMF’s experience with Pakistani authorities, the report serves as a stern warning, cautioning that the continuation of the new programme is contingent upon implementing fiscal discipline, embracing market-determined exchange rates, and making strides in structural reforms. Moreover, the report underscores the exceptionally high downside risks, emanating from both the tense political environment and potential deviations from agreed policies. These risks pose a significant threat to the programme’s success, jeopardizing macro-financial stability and debt sustainability. To navigate the challenges ahead and meet external debt obligations, it is apparent that a longer-term IMF programme will be inevitable for the next government. The path forward demands unwavering commitment to the IMF’s stipulations, as Pakistan strives to secure its economic stability and prosperity.