Pakistan set to initiate ‘difficult’ IMF talks

WASHINGTON: The country’s debt burden will feature prominently in talks as Pakistan engages with the International Monetary Fund (IMF) later this month to seek assistance in boosting its ailing economy.

The first such engagement, expected this month, will focus on the release of the final tranche of the expiring $3 billion loan package. Pakistan will initiate another round of talks for a new three-year arrangement worth $6bn.

In a statement earlier this week, the IMF conveyed its interest in opening talks with the country’s new government on both packages.

The inaugural foreign task for Pakistan’s incoming finance minister, upon appointment, will involve representing the country at the IMF and World Bank’s annual spring meetings next month.

Debt burden to feature in discussions with lender later this month

The primary ministerial meetings are scheduled from April 17 to 19, accompanied by additional events and activities throughout the week from April 15 to 20. Pakistan has communicated its intention to attend the meetings, with the new finance minister slated to lead the delegation.

A noteworthy occurrence this year is India’s appeal to the IMF, urging them to “ensure that Pakistan does not divert loans to cover defence expenses”, as reported by the Indian media.

While India holds a position on the IMF Executive Board, it has historically refrained from making public comments on the Fund’s loan packages for Pakistan.

While the influence of India’s request on the IMF’s decision remains uncertain, it is evident that the political stability or instability in Pakistan will significantly shape the country’s negotiating position for loans with lenders.

As Michael Kugelman, a South Asian affairs scholar at Washington’s Wilson Center, noted, in recent months, the IMF has conveyed its desire to Pakistan for enhanced political stability at least twice.

“For an institution that doesn’t typically publicly comment on the domestic politics of the countries it funds, this is remarkable,” remarked Kugelman.

He pointed out that the Fund’s latest statement was “clearly a response” to Imran Khan’s letter, urging the IMF to assess the political situation in Pakistan before finalising a new deal.

“We are likely witnessing the Fund recognising its significant stake in overall stability, including the political environment, in a country that is one of its most longstanding yet challenging clients,” he said.

As Murtaza Haider, a professor at Toronto Metropolitan University who is also associated with the Pakistan Institute of Development Economics, noted, last month’s election alleviated immediate concerns of instability but the lingering risk of a comprehensive economic crisis underscores the urgency for the new administration to secure a more substantial IMF programme.

The current $3bn IMF package concludes this month, making the acquisition of a larger financial arrangement a top priority for the government.

“The IMF statement referring to the importance of the institutional environment for economic stability and growth must alert the establishment and the newly formed government in Pakistan,” he said.

Pakistan faces a challenging economic situation with a debt-to-GDP ratio surpassing 70 per cent. Analysts highlight that the primary concern lies in domestic debt, accounting for 60 per cent of the total debt and 85 per cent of the interest burden.

Additionally, the external debt, largely in dollars, is predominantly owed to bilateral and multilateral creditors, making up 85 per cent of the total.

Notably, China holds a significant portion, nearly 13pc, of Pakistan’s total debt, mainly allocated to infrastructure projects.

Pakistan’s reliance on tax and gas tariff hikes, coupled with a sharp rupee depreciation, has led to a staggering 30pc year-on-year inflation rate.

Despite expectations for a decrease later in the year, economists predict it will continue to intensify pressure on the local currency.

Published in Dawn, March 11th, 2024