Pakistan’s debt crisis fuelled by more IMF loans

3 July 2024

Activists of PMML protest demonstration against the issues of inflation, unemployment, and hike in the prices of gas, electricity and petrol, in Peshawar, 2 August 2023. Credit: Asianet-Pakistan, Shutterstock.

The IMF has opened discussions with Pakistan on a new loan as its current $3 billion programme draws to a close. In March, the Fund approved the “immediate disbursement” of the last $1.1 billion tranche, urging the government to implement further fiscal consolidation reforms, such as removing subsidies to export sectors and reducing import duties in the upcoming budget with potential negative implications on the local market.

The government is seeking another long-term loan from the IMF in an attempt to escape default, as the country is still reeling from a severe economic crisis after the devastating floods that impacted 33 million people more than two years ago (see Observer Autumn 2022, Winter 2021). With reserves depleted to $3 billion in February 2023, the loan increased Pakistan’s foreign reserves to $8 billion, enough to cover over eight weeks of imports.  Its economy is particularly burdened by debt obligations. The country has a debt-to-GDP ratio of over 70 per cent and requires between 50 and 60 per cent of the government’s revenues to pay for debt interest payments. Only default-stricken Sri Lanka, Ghana and Nigeria are worse off (see Observer Spring 2023). Civil society organisations have long called for international financial institutions to cancel Pakistan’s debt and put people’s rights and needs ahead of debt servicing.

When the ‘lender of last resort’ becomes a primary creditor

While the IMF highlighted in its final review of the current programme in May that Pakistan’s “economic and financial position has improved” in recent months, with reduced inflation and more stable foreign reserves, these economic indicators are a ‘mirage’ because perceived stability is due to more loans coming in. Pakistan is looking to negotiate a larger, long-term loan to help stabilise economic activity and to request additional financing from the IMF under the Resilience and Sustainability Trust (see Inside Institutions, What is the IMF Resilience and Sustainability Trust?). But in order to do that, the government must seek parliamentary approval on major economic reforms related to the energy, power and tax sectors, and on the privatisation of state-owned enterprises before starting formal talks for another programme. If secured, the new loan would be the 24th IMF loan for Pakistan with the country already owing the IMF $7 billion, further illustrating the failure of IMF reforms to address Pakistan’s long-term economic issues, while subjecting the country to additional surcharge penalties for over-relying on IMF funding (see Inside Institutions, What are IMF surcharges?). The Fund’s loan conditionality, focused on fiscal consolidation and regressive taxation, has a long track record of exacerbating poverty and inequality and harming human rights in Pakistan, according to a recent Human Rights Watch report.

Pakistan was forced to adopt harmful measures before in order to meet IMF conditions (see Observer Spring 2022), particularly by raising taxes on the country’s nascent renewables energy market, threatening its international climate obligations. As the Fund has itself acknowledged, similar measures are likely to fuel more protests country-wide over the coming year. In the latest instance, several thousand people in the northern state of Azad Kashmir protested over high prices of flour and electricity between 8 and 14 of May, following IMF mandated subsidy cuts and a switch to a market-based exchange rate.

“Still reeling from the 2022 floods, Pakistan was forced into a year of brutal austerity under the Stand-by Arrangement, pushing Pakistan deeper into debt crisis and sending over 4 million souls into poverty with food and energy inflation at a multi-year high. Following an early round of negotiations on a new loan, the Pakistani government has now been forced to raise the electricity tariff by another 20 per cent with the new budget inaugurating a fresh round of subsidy removals and devastating tax hikes. Despite independent experts and local coalitions raising the alarm on the unsustainable nature of the Fund’s fiscal strategies and debt analytics, the Fund has remained insular insisting on its business as usual approach threatening to push the nation beyond the point of recovery,” highlights Zain Moulvi, Research Director at Alternative Law Collective.