Pakistan’s economic muddling and the IMF challenge

The falling rupee, depleting foreign exchange reserves, energy shortage, increasing fuel prices and a complicated external support highlight the contemporary economic crisis Pakistan is in. Will Islamabad find a way out?

The Pakistani rupee (PKR) has been falling continuously; from 150 in April 2021 to 213 against the dollar on 21 June, an all-time low. Pakistan’s foreign exchange reserves have been depleting during the last one year. According to State Bank of Pakistan data, from $17.2 billion in June 2021, the net reserves with the SBP have come down to $8.9 billion in June 2022.

The new government has already increased the fuel price — in late May and early June. Besides, the new budget has proposed resuming the petroleum development levy. This would mean increased oil and electricity prices, which has the potential to bring people to the streets. Earlier this month, citing “heightened external vulnerability risk” and the “ability to secure additional external financing,” the rating agency Moody’s downgraded Pakistan’s outlook to negative. 

The government-International Monetary Fund (IMF) talks have remained complicated.

The immediate future of Pakistan’s economy would depend on IMF resuming its support. Despite an intense discussion between the two, there has not been a breakthrough until now.

Pakistan’s relationship with the IMF has remained complicated. Though Islamabad has been negotiating with the IMF repeatedly, there has been an economic nationalism, mostly jingoistic, against approaching the IMF in recent years. Imran Khan, the former Prime Minister made statements and fuelled the sentiments against the IMF. After becoming the PM in 2018, he preferred approaching friendly countries (China and Saudi Arabia) and avoiding the IMF. The new government is now back to the IMF; it expects the IMF to release the payments, expand the support programme, and give a longer rope to repay.

The IMF is willing to support Pakistan but has some conditions regarding macroeconomic reforms. This was highlighted in the IMF statement after the last meeting in May 2022. The IMF wants Pakistan “to address high inflation and the elevated fiscal and current account deficits, while ensuring adequate protection for the most vulnerable.” The IMF would also not want any deviations from what has been agreed to, especially concerning fuel and power subsidies. Besides, the IMF wants Pakistan to be transparent about its debt situation, including what Islamabad owes to China, as a part of the China-Pakistan Economic Corridor (CPEC).

Subsidies are politically sensitive; with elections ahead, it would not be an easy decision. The new budget also has proposed resuming the petroleum tax levy. With the above, the new government expects that the IMF will consider resuming its package.