Why Pakistan Is on the Road to Another IMF Bailout

(Bloomberg) -- Pakistan’s economy is going through a familiar boom-and-bust cycle that sees it back at the door of the International Monetary Fund. Debt is soaring, the current-account deficit is widening, reserves are falling and the currency has been devalued multiple times since December. Imran Khan’s new government has put together a team to meet with the IMF about yet another aid package, with his finance minister Asad Umar leading negotiations.

1. How many bailouts has Pakistan needed?

Twelve since the late 1980s. Most recently, in 2013, the government of Nawaz Sharif agreed to terms for an IMF loan of $6.6 billion disbursed over 36 months. During that time, the government mostly fell short of broadening the tax base or privatizing money-losing state-owned companies, as the IMF had hoped. Nevertheless, the economy rebounded after the IMF program, with growth accelerating, stocks soaring, the currency stabilizing and foreign-exchange reserves tripling to a record. All of that came undone last year as higher oil prices and the growth boom pushed up demand for imports, the current-account gap widened and reserves started to slide.

2. What would a next bailout look like?

The new government may need more than $12 billion, Umar said in August. That would be higher than the biggest IMF package extended to Pakistan until now, a $7.6 billion loan in 2008. The IMF typically provides three-year loan programs under its Extended Fund Facility to help countries facing balance-of-payments crises. The loans are often tied to economic targets the government has to meet, for example curbing fiscal or current-account deficits, trimming inflation or allowing more flexibility in currency policy.

3. Would the IMF be willing to extend yet another loan?

The Washington-based lender hasn’t commented directly about the possibility. This month, it said Pakistan needed significant external funding to stabilize its economy and that recent government efforts weren’t sufficient to stop a mounting financial crisis. In a May report, the IMF had weakened Pakistan’s economic growth outlook to 4.7 percent in the year that began in June, from an estimated 5.6 percent in the previous fiscal year. On Oct. 9, it said growth may moderate to 4 percent in 2019 and to about 3 percent in the medium term.

4. Does Pakistan have other options?

China has become a bigger player in Pakistan’s economy, financing billions of dollars of power and road projects as part of its Belt and Road program. Though China has denied that it’s taking an IMF-like role in lending to Pakistan, that could be an option in the future. Funding from China typically doesn’t come with the kind of strings attached to IMF loans. An IMF loan is looking more likely since Pakistani delegations that recently visited China and Saudi Arabia made no announcement that they had secured external funding from those countries.

5. How urgent is the problem?

Pakistan’s external balances have weakened considerably. Foreign-exchange reserves have dropped to the lowest level in almost four years; the government is running twin current-account and budget deficits of more than 5 percent of gross domestic product. That means it has less foreign funding to repay debt and pay for much-needed imports to keep the economy going. Weaker external balances are the main reason Moody’s Investors Service cut the nation’s credit-rating outlook to negative in June.

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