After months of difficult negotiations, Islamabad and the International Monetary Fund (IMF) declared on Sunday that they had reached an agreement on a fresh bailout package for Pakistan. If the deal is approved by the IMF's management, the South Asian nation will receive $6 billion (€5.34 billion) in financial assistance over a period of three years to stave off a balance-of-payments crisis.
Abdul Hafeez Shaikh, Pakistan's de facto finance minister, told the state-run Pakistan Television that he hoped it would be his country's last bailout package from the IMF.
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Under the deal, Pakistan would give up central bank control of the currency to adopt a market-based exchange rate and take measures to improve the functioning of loss-making state-owned firms as well as curtail subsidies, among other things. The World Bank and the Asian Development Bank would provide up to $3 billion in additional assistance in pursuance of the IMF deal, Hafeez Shaikh said.
The economy of the majority-Muslim nation with a population of over 200 million has slid deeper into crisis since Imran Khan took over as prime minister last year. Burgeoning fiscal and current account deficits and a dip in revenues from tax collection are at the heart of the crisis.
"Pakistan is facing a challenging economic environment, with lackluster growth, elevated inflation, high indebtedness, and a weak external position," Ernesto Ramirez Rigo, who led the IMF mission to Pakistan, said in a statement on Sunday. "The authorities recognize the need to address these challenges, as well as to tackle the large informality in the economy, the low spending in human capital, and poverty."
A challenging environment
"Through the IMF bailout package, Pakistan will resolve its balance-of-payments crisis. There is currently a financing gap of $12 billion and the bailout will help bridge the gap this year as well as in the coming three years," Minister of State for Revenue Hammad Azhar told DW.
Pakistan has gone to the IMF numerous times since 1980 seeking bailouts. The country has had a tense relationship with the lender as the conditions attached to the assistance are always unpopular.
PM Imran Khan initially appeared reluctant to approach the IMF for aid, fearing that it would impose tough conditions on government policy. Instead, Khan's administration sought billions of dollars in help from "friendly countries," including Saudi Arabia, China and the United Arab Emirates, to fix the nation's finances.
But with inflation climbing to over 8%, the rupee losing a third of its value over the past year, and foreign exchange reserves barely enough to cover two months of imports, it was forced to turn to the IMF.
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Analysts have warned that any IMF deal would likely come with strict conditions that could restrict PM Khan's ability to fulfil his grand promises to build an "Islamic welfare state," as the country is forced to tighten its purse strings.
"The IMF deal, with the austerity measures it will entail, will be a political blow to a Pakistani government that had promised to build out a new welfare state," Michael Kugelman, a South Asia expert at the Washington-based Woodrow Wilson Center for Scholars, told DW. "The IMF package will make it quite tough for Khan to achieve his economic promises and therefore undercut the populist image that he has sought to showcase to the electorate," he added.
This view is shared by Kaiser Bengali, a renowned economist in Pakistan. "The IMF has an agenda to privatize the assets of the country, which will lead to massive unemployment," said the expert.
The bailout announcement comes as discontent is already growing over measures Khan's government has taken to fend off the crisis, including devaluing the rupee by some 30% since January 2018, sending inflation to five-year highs.
Khan came to power after winning a simple majority in last year's parliamentary elections on promises to improve the country's economy and provide jobs to people. But his critics say his government has so far not been able to honor his commitment to the masses. A government report published on Friday also noted that Pakistan's growth rate is set to hit an eight-year low, with the country's GDP rate likely to sink to 3.3%t against a projected target of 6.2%.
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But some observers say the IMF package will be beneficial to end the growing uncertainty and build investor confidence. "The deal will put an end to uncertainty and improve Pakistan's financial situation," Abid Sulehri, an economist, told DW. "Even though it might have some negative effects, in the form of a rise in inflation, it will produce positive results in the long run."
When asked why China didn't come to Pakistan's rescue, Minister Azhar said: "China has already been providing funding for Pakistan's trade and infrastructure development, and we opted for the IMF funding so as to introduce structural reforms in the economy."
The United States, which has tremendous influence over the IMF, warned last year that any potential international bailout for Pakistan should not provide funds to pay off Chinese lenders.
"Make no mistake. We will be watching what the IMF does," US Secretary of State Mike Pompeo said. "There's no rationale for IMF tax dollars, and associated with that American dollars that are part of the IMF funding, for those to go to bail out Chinese bondholders or China itself," Pompeo added. It's not yet clear if the bailout agreement reached on Sunday enjoys Washington's backing.
Pakistan's crisis also comes as the country is facing possible sanctions from the Financial Action Task Force — an anti money-laundering monitor based in Paris — for failing to rein in terror financing.
The organization will soon decide whether to add Pakistan to a blacklist that would trigger automatic sanctions, further weakening its already faltering economy.