Central Idea

• Pakistan secures $3 billion International Monetary Fund (IMF) Stand-By Arrangement (SBA) to address the country’s economic crisis and falling reserves.
• The agreement aims to stabilize the economy and tackle the balance of payments issues that Pakistan is facing.

IMF and its Bailout

• The IMF is an international organization that provides loans, technical assistance, and policy advice to member countries.
• Established in 1944 to promote international monetary cooperation, exchange rate stability, balanced economic growth, and poverty reduction.
• Headquarters located in Washington, D.C., and it has 190 member countries.
• An IMF bailout, also known as an IMF program, is a loan package provided to financially troubled countries.
• Bailout programs have specific terms and conditions that borrowing countries must meet to access the funds.

Quick recap: Pakistan Economic Crisis

• The 2022-2023 economic crisis in Pakistan coincides with political unrest in the country.
• Rising food, gas, and oil prices have aggravated the economic challenges faced by Pakistan.
• The IMF’s decision to halt disbursement of funds under the 2019 Extended Fund Facility (EFF) program exacerbated the financial crisis.

Causes of the Economic Crisis

• Impact of the Russian invasion of Ukraine: Worldwide fuel price hike affecting Pakistan’s import-dependent economy.
• Excessive external borrowings: Raised concerns of default, leading to currency depreciation and expensive imports.
• High inflation and food prices: By June 2022, inflation reached record levels, adding pressure on the economy.
• Poor governance and low productivity: Contributing factors to the balance of payment crisis and insufficient foreign exchange earnings.

Impact on the Pakistani Economy

• Balance of payment crisis: Inability to generate enough foreign exchange to cover import expenses.
• Currency depreciation: Weakening of the Pakistani rupee against major currencies, further exacerbating import costs.
• Rising inflation: Placing a burden on the population, particularly with escalating food prices.
• Economic instability: The crisis is considered the most significant since Pakistan’s independence.

What’s’ the new SBA Deal?

• Electricity subsidies: The agreement calls for the discontinuation of historically heavy subsidies in the power sector. There will be a timely rebasing of power tariffs to ensure cost recovery, which may lead to inevitable price hikes for consumers.
• Import restrictions and exchange rate: Pakistan’s central bank will be required to remove import restrictions and adopt a fully market-determined exchange rate, aligning with the IMF’s directive.
• Inflation control measures: The IMF emphasizes the need for the central bank to be proactive in curbing inflation, especially its impact on vulnerable segments of society. This may involve further interest rate hikes.
• Fiscal discipline: The Pakistani authorities are urged to resist pressures for unbudgeted spending or tax exemptions, ensuring responsible fiscal management.

Obligations laid on Pakistan

• The $3 billion IMF support is part of the overall financial aid required to address Pakistan’s external payment obligations.
• Pakistan will continue to seek additional multilateral and bilateral assistance to meet its financial commitments.
• Support from countries such as the UAE, Saudi Arabia, and China is expected, further contributing to Pakistan’s financial stability.

Reaction to the Deal

• The response from analysts and economists has been mixed, with some expressing optimism that the agreement will restore investor confidence in Pakistan’s economy.
• However, there are concerns regarding the government’s ability to adhere to the rigorous conditions imposed by the IMF.

Conclusion

• The IMF deal provides a temporary respite and financial support to address Pakistan’s economic challenges.
• However, the successful implementation of the agreement and the long-term stability of Pakistan’s economy will require sustained efforts, adherence to conditions, and comprehensive structural reforms.

Get an IAS/IPS ranker as your 1: 1 personal mentor for UPSC 2024

Attend Now