Pakistan’s repeated return to IMF programmes creates a loop that reflects not only the economic pressures but also the issues faced by the government in implementing reforms that can produce long-term stability. During IMF programmes, Pakistan’s economy has stabilised repeatedly, only to face the same cycle repeating itself. According to IMF data, Pakistan has entered into 25 separate IMF programmes, yet each economic crisis seems to bring the country back to square one. Why has repeated financial assistance failed to produce lasting economic stability?
What is the IMF, and Why Do Countries Need It?
The International Monetary Fund (IMF) was established in July 1944, after World War 2.
Its primary motive was to help the countries overcome the post-war difficulties by providing financial assistance. The recent data state that it has a total of 191 member countries, with its headquarters in Washington, DC. It aims to promote international monetary cooperation, exchange stability, facilitate the expansion and balanced growth of international trade, and make resources available for countries with balance of payment (BOP) difficulties.
The balance of payment (BOP) crisis is generally linked to the foreign exchange reserves, generally termed ‘Forex reserves’. The purpose of foreign exchange reserves is to manage its international financial obligations and stabilise its economy. It includes assets like the foreign currency reserve (aka liquid currency), gold reserves (aka store of value), special drawing rights (SDRs), and reserve tranche positions in the IMF (RTPs).
Pakistan’s Long Relationship With the IMF
In the year 1950, Pakistan became a member of the IMF. Since joining the IMF, Pakistan has entered into 25 separate IMF programmes. While these programmes have stabilised the country for a short period of time, the long-term goals are still challenging for the country. These include external financial pressure, fiscal deficits, instability during economic crises, and a shortage of foreign exchange reserves. For example, a fixed tariff may be introduced on household consumer essentials, which increases the import bills.
In addition, the foreign exchange rates have increased significantly, in contrast to the Pakistani currency, which has seen a rapid decline over the decade. It can further be explained as a persistent shortage of foreign exchange reserves that has repeatedly created pressure on Pakistan’s economy. For example, importing oil requires dollars, buying many essential goods requires dollars, and most importantly, according to the IMF’s loan repayment policy, the loan must be paid in the five most solid currencies in the world. Namely, the US dollar, euro, Chinese RMB, Japanese yen, and British pound.
As a result, Pakistan keeps returning to the IMF despite decades of efforts to reform.
Why Are Reforms Difficult?
According to the recent IMF data, the reforms required are (i) building resilience to natural disasters and strengthening public investment; entrenching macroeconomic stability through consistent implementation of sound macro policies; making scarce water resource usage more efficient; reforming SOEs; improving public service provision; developing human and physical capital by expanding health, education and social protection spending; restoring energy sector viability; and intensifying anti-corruption efforts.
IMF reforms are often difficult because they require the government to make the essential economic decisions, which might be unpopular for the citizens of the country. Implementing the reforms can occur in various aspects, like increased taxation, reduced subsidies, utilisation of domestic products, and balancing the government expenditure. These implementations are crucial for Pakistan’s economy. To overcome the fiscal deficit, the government may also raise utility prices, which can also increase financial pressure on the citizens in the short term.
As the tension among the citizens rises, they might protest against the government and further exhaust the already exhausted resources. To avoid the inner conflicts, governments take strong incentives to delay or soften the reform processes.
Furthermore, the government often faces pressure to maintain public support, making long-term reform difficult to sustain.
In conclusion, this creates a cycle in which economic issues are stabilised temporarily but not fully resolved.
The New Creditors
With debts to repay and increased import bills, and with an additional rise in tariffs, it exhausts Pakistan’s forex reserves. While the IMF remains a major emergency financial assistance, allies like China, Saudi Arabia, and the UAE have become external partners of financial support during the economic crisis.
This diversification of lenders has evolved Pakistan’s financial situation significantly over the past decades.
However, even with the backing of new creditors, the importance of the IMF has not reduced. The emergence of new creditors has diversified Pakistan’s financial dependence options, but the need for structural reforms has not been eliminated.
Now, it gives rise to a question: Does borrowing from multiple sources solve the underlying problems? The answer is simple: no. External support can provide temporary relief and time, but it cannot replace reforms.
Does it simply state that dependence has changed forms rather than disappeared?