Is the IMF ‘sabotaging’ Pakistan? Is the lender rethinking $7-billion loan deal with bankrupt nation?

What do you do when your country is in economic doldrums? For many, the answer is to approach the International Monetary Fund (IMF) and seek a bailout. It seems that is the option that even Pakistan chose as their economy tanked in 2022.

However, it now seems that the IMF isn’t too keen on bailing out Islamabad, if Deputy Prime Minister Ishaq Dar and others are to be believed.

What’s exactly going on? Is the IMF rethinking its bailout of Pakistan? What are the factors leading to a delay in sealing the deal? And what does it mean for Islamabad if the IMF delays the economic package further?

What IMF deal?

Earlier in July, Pakistan and the International Monetary Fund (IMF) agreed on a $7 billion aid package spread over more than three years to help Islamabad cope with its struggling economy. The global lender said in a statement, “Building on the economic stability achieved under the 2023 Stand-by Arrangement (SBA), IMF staff and the Pakistani authorities have reached a staff-level agreement on a 37-month Extended Fund Facility Arrangement (EFF) of about $7 billion,” adding that the deal was subject to approval by the IMF’s Executive Board.

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This announcement came after an IMF team led by Nathan Porter, IMF’s Mission Chief to Pakistan, held discussions with the Pakistani side during the May 13-23, 2024, staff visit to Islamabad.

Interestingly, this deal was Pakistan’s 24th bailout from the IMF — the highest for any country in the world. Moreover, as per an FDIintelligence report, Islamabad is also the IMF’s fourth-largest debtor.

The loan came on the heels of Pakistan suffering one of Asia’s worst recent economic crises. Inflation surged as high as 38 per cent and central bank reserves had dipped below $3 billion, less than three weeks’ worth of imports.

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To secure this deal, the Shehbaz Sharif government introduced a number of reforms, including raising taxes and increasing household energy tariffs.

What has happened since?

It’s important to note here that the $7 billion dollar deal was agreed at a staff level. However, it still needs approval from IMF’s Executive Board; as Nikkei Asia reports, deals must get an official nod from the IMF’s executive board.

The deal was first expected to be discussed by the IMF’s Board in August, with Pakistani Finance Minister Muhammad Aurangzeb being quoted as saying that the agreement would be finalised in August. This was then pushed to September 9. And now, it seems that the discussion on this won’t happen until September 18, if it happens at all. In his latest comments on the issue, Aurangzeb said the loan agreement, the biggest in recent memory, was in its “advanced stages”, reported Nikkei Asia.

And these delays have reportedly perturbed Islamabad’s leadership. Pakistan Deputy Prime Minister Ishaq Dar has, according to a Dawn report, criticised the global lender, accusing it of deliberately delaying the disbursement of funds.

At a Defence Day event organised last week by the Overseas Pakistani Foun¬dation at the Millennium Gloucester Hotel in South Kensington last week, the Dawn quoted Dar, who is also the country’s foreign minister, as saying, “In the past two-and-a-half years, attempts have been made to sabotage Pakistan’s critical negotiations with the IMF.

“There was geopolitics at play when Pakistan was close to default. Why shouldn’t I raise a finger when our technical review is complete … Why are they wasting our time?” he said.

“I was in the last government for 11 months and reviews kept going on… my assessment is they wanted Pakistan to default. Our politicians should be wary of this — we are a nuclear state. Every time we go in that direction [of economic success], our legs are pulled. Conventional wars are over. [The disbursement] was delayed for eight months and that, in the economic life of a country, is a big crime,” he added.

Muzzammil Aslam, the top financial adviser for Khyber Pakhtunkhwa province, which was directly involved in the negotiations, has also been quoted as telling Nikkei Asia that the delay is concerning. “The board delay is beyond comprehension,” he was quoted as saying.

What’s behind the ‘delay’?

The IMF has not commented on the loan issue. But according to Dar, it’s an intentional move by the Western powers.

However, observers and officials note that there are a number of reasons behind the delay in finalising the deal. According to a Tribune Express report, the biggest possible reason could be Islamabad’s failure to roll over $12 billion in debt and win another $2 billion in loans from creditor countries, including top investor China.

In July, the Shehbaz Sharif government in Pakistan requested Beijing to defer payments for the $15 billion it owes the Asian giant in the power sector. However, China is yet to respond to their request.

“The inability [of Pakistan] to convince Chinese [power producers] to provide relief in debt repayments has emerged as a significant challenge for Pakistan,” Aqdas Afzal, an associate professor of social development and policy at Habib University in Karachi, told Nikkei Asia.

The IMF also requires Pakistan to stop subsidies. However, the Punjab province of the country has rolled out a $160 million subsidy for electricity consumers, who are sweltering in a heatwave. Naafey Sardar, assistant professor of economics at the US-based St. Olaf College was quoted as telling Nikkei Asia, “The Punjab government’s electricity subsidy plan seems to be one of the key sticking points for the IMF.”

How will it affect Pakistan?

If Dar is to be believed — though it sounds far-fetched — a delay by the IMF could push Pakistan to the brink. The Tribune Express notes that without an IMF loan, the country stares at a debt-repayment obligation of more than $26 billion.

Additionally, the economy is shrinking below a two per cent growth rate and the rupee is barely holding up around 280 a dollar. This is shrinking the common man’s purchasing power and pushing him further into poverty.

But Aqdas Afzal remains optimistic. He said, “There may be some delay, but Pakistan will be able to get the [loan] from the IMF that has already been agreed.”

With inputs from agencies