Why Pakistan Is on the Road to Another IMF Bailout

(Bloomberg) -- Pakistan’s economy is going through a familiar boom-and-bust cycle that may see 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 four times in just eight months. A new government under Imran Khan, whose party claimed victory in a disputed election, may find that one of its first duties is to put together a team to negotiate with the IMF on yet another aid package.

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 seek $10 billion to $15 billion, according to Karachi-based brokerage Insight Securities. 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 of a bailout. In a May report, it said an “increase in macroeconomic vulnerabilities and domestic policy slippages” had weakened Pakistan’s growth outlook to 4.7 percent in the year that began in June, from an estimated 5.6 percent in the previous fiscal year. Jihad Azour, director of the IMF’s Middle East and Central Asia Department, said in April that he expected things to improve after the election and that the new government “will reconfirm their resolve to the reform agenda” and address a current-account deficit that’s impeding growth.

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.

5. How urgent is the problem?

Pakistan’s external balances have weakened considerably. Foreign-exchange reserves have dropped to the lowest level in three-and-a-half years; the current-account deficit widened 42 percent to $18 billion in the year through June. That means the government 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 recently cut the nation’s credit-rating outlook to negative.

6. What’s the next step?

Preliminary results show Khan’s party probably didn’t win an outright majority, so he’ll need to strike a deal with coalition parties before forming a government, while also fight allegations of widespread vote rigging. He said in a televised address claiming victory that fixing the economy was the “greatest challenge.” He has previously said he won’t rule out an IMF bailout and Asad Umar, who’s tipped to be Khan’s finance minister, said in May the economy was close to bankruptcy and would need financial aid, with the IMF being one option.

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