FAMILIARITY, THEY say, breeds contempt. Few countries are as familiar with the IMF as Pakistan. The over-indebted country of 200m people has obtained 21 loans from the fund, as many as Argentina. On May 12th this familiarity deepened further. The country’s government, led by Imran Khan, a former cricket star who heads the Pakistan Tehreek-e-Insaf party, said it had reached a deal with the IMF’s staff to borrow another $6bn over three years. The agreement now awaits formal approval from the fund’s bosses in Washington, and the support of other international lenders, including the World Bank and the Asian Development Bank.
The loan will relieve Pakistan’s dollar shortage but do little to improve the IMF’s standing in the country. In return for its money, the fund expects the government to raise tax revenues and utility prices—and to let the currency fall, if need be. That will help narrow Pakistan’s wide trade and budget deficits. But it will also curb growth and increase inflation in the short term.
The full agreement has not yet been published. But some details have been released and others leaked to the local press. Pakistan must cut its budget deficit (before debt service) to 0.6% of GDP next fiscal year (which starts in July) from the deficit of over 1.7% that the IMF expects for this year. To meet this goal, the government has reportedly promised to remove tax breaks worth about 350bn rupees ($2.5bn or 1% of GDP) next year and to raise the price of gas and electricity. It has pledged to give the central bank, the State Bank of Pakistan, more autonomy in its fight against inflation (which has increased sharply to over 8%). It will also let market forces dictate the rupee’s exchange rate, which has been devalued by over 18% against the dollar in the past year.
To ease the public’s pain, the IMF will allow the government to spend more on welfare schemes, such as a cash-transfer scheme named after Benazir Bhutto, a former prime minister who was assassinated in 2007. But her son, Bilawal Bhutto Zardari, who now leads her party in opposition, seems unimpressed. After the government this month appointed a former IMF official to head the country’s central bank, Mr Bhutto Zardari accused it of surrendering Pakistan’s autonomy. “How can IMF negotiate with IMF?” he asked. A cartoon in the Friday Times, a local news weekly, showed Christine Lagarde, head of the fund, sitting across the negotiating table from herself.
In truth, Mr Khan’s government tried hard—perhaps too hard—to keep its distance from the fund. Instead of agreeing a deal as soon as it came to power in August 2018, it turned for help to friendly powers instead, including Saudi Arabia (which gave $3bn and deferred a similar amount of oil payments), the United Arab Emirates ($3bn) and China, which added another $2.2bn. China is investing heavily in Pakistan’s roads, ports and power plants, building what has been called the China-Pakistan Economic Corridor (CPEC). Some view this lending with suspicion, seeing Pakistan as a victim of China’s “debt-trap diplomacy”.
Such an assessment seems premature. CPEC spending may have contributed to the increase in Pakistan’s imports (the country’s current-account deficit exceeded 6% of GDP in the year to June 2018). But because this outflow of import spending was presumably matched by an inflow of Chinese capital, it cannot have been responsible for the dangerous dwindling of Pakistan’s foreign-currency reserves over the past year.
That was instead the result of Pakistan’s own macroeconomic muddle. The previous government pursued both an over-valued exchange rate, which was too strong for Pakistan’s beleaguered exporters, and imprudent fiscal spending, which was too strong for Pakistan’s feeble revenue-raising powers. The dollars provided by Pakistan’s allies in China and the Gulf have temporarily alleviated this problem of falling reserves. But solving it was always going to require policy reforms, which are difficult for bilateral allies to demand or monitor. Better to leave those tasks to the IMF.
Not that the IMF will find it easy. Pakistan is a regular taker of the fund’s loans but not a diligent follower of its advice. Many of the reforms it has promised in the latest agreement have been pledged repeatedly before, including widening the tax net, rationalising utility prices and respecting the central bank’s autonomy. When push comes to shove, Pakistan’s governments have been reluctant to follow through, afraid of losing the support of powerful, but lightly taxed, domestic constituencies.
For their part, the IMF’s staff have been reluctant to cut Pakistan off, for fear of the upheaval that would ensue. “Governments have tried to ‘game’ the IMF, and achieved partial success each time,” write Ehtisham Ahmad and Azizali Mohammed, two former IMF advisers, in their history of the pair’s relationship. Pakistan’s public might dislike the IMF less, if they knew how frequently their leaders disregard it.