Pakistan stands at the brink of securing its 24th bailout from the International Monetary Fund (IMF), a staggering figure that highlights the country’s reliance on international financial assistance. This latest bailout, a $7 billion 37-month extended fund facility, follows the IMF’s release of a $1.1 billion tranche in April 2024, which completed a $3 billion stand-by arrangement signed in July 2023. While these IMF interventions have repeatedly saved Pakistan from defaulting on its international debt obligations, they have also plunged the country deeper into a vicious cycle of debt accumulation, with significant consequences for its economic stability and political landscape.

A Vicious Cycle of Debt Accumulation

Pakistan, home to 236 million people and the world’s fifth-most populous country, has seen its debt levels balloon over the last two decades. As of June 30, 2024, the country’s total debt and liabilities reached almost PKR 85 trillion ($306 billion), marking an 11% year-on-year increase, according to the State Bank of Pakistan (SBP). The debt-to-GDP ratio, although reduced to 80% by June 2024 due to high inflation, remains unsustainable, especially for a developing economy. Comparatively, experts suggest a sustainable ratio for Pakistan would be closer to 50%, far below its current standing.

One of the most alarming statistics is the scale of Pakistan’s public debt, which has surged to over 700% of gross government revenue—more than double the average for countries with similar credit ratings. Pakistan’s debt servicing alone is absorbing a shocking 57% of government revenues, a higher share than countries like Sri Lanka (54%) and Bangladesh (32%), according to Fitch Ratings.

External debt presents an equally grim picture. Pakistan’s external liabilities rose to $130.5 billion by the end of June 2024, an increase of $4.4 billion over the previous fiscal year. Much of this was driven by fresh IMF loans and new deposits from Saudi Arabia and the UAE. External debt servicing, although slightly reduced from $20.8 billion to $16.9 billion, still represents a massive financial burden for the country. Meanwhile, Pakistan’s foreign exchange reserves remain perilously low, with external debt maturing at an estimated 1.8 times the central bank’s reserves, leaving the country heavily dependent on further financial aid.

IMF Bailouts: Lifeline or Curse?

Pakistan has turned to the IMF more frequently than any other country, and each time the bailout provides temporary relief while imposing stringent conditions that often lead to increased economic hardships for the population. The conditions attached to the IMF’s latest program include imposing new taxes, particularly targeting the retail sector, and raising electricity tariffs, which have hit the poor and middle-class citizens the hardest. Between 2021 and 2024, electricity prices skyrocketed by 155%, prompting many households to reduce their energy consumption for the first time in 16 years.

IMF-mandated reforms also include fiscal austerity measures, which, while intended to reduce Pakistan’s fiscal deficit, have led to cuts in social spending and investments in key sectors like education and healthcare. Interest payments on public debt now crowd out spending on these critical areas, exacerbating poverty and inequality. According to both the World Bank and the Pakistani government, poverty levels have risen sharply, with businesses and households under increasing financial stress.

On the positive side, the IMF estimates Pakistan’s GDP growth at 2% for the fiscal year ending in June 2024, following a contraction of 0.2% in the previous year. Moreover, the country’s fiscal position has shown some improvement, with a primary surplus of 1.8% of GDP achieved in the first half of fiscal year 2023-24, ahead of projections.

The Power Sector Crisis and Unresolved Structural Problems

One of the thorniest issues confronting Pakistan’s economy is its power sector. The IMF has expressed particular concern over Pakistan’s unresolved power sector debt, which played a significant role in ending the previous $3 billion bailout in April 2024. The country’s energy sector has been plagued by inefficiencies, leading to persistent shortages, outages, and financial losses. To meet IMF conditions, the government has raised electricity tariffs, but the reforms have yet to resolve the deep-seated structural problems in the sector.

The power sector’s inefficiencies not only burden the country’s economy but also contribute to the overall fiscal deficit. Unpaid energy subsidies, announced both at the provincial and federal levels, have added to the financial strain. This, coupled with Pakistan’s reliance on energy imports, leaves the country vulnerable to fluctuations in global fuel prices, further complicating its fiscal and economic outlook.

Political Instability Compounds Economic Woes

Economic instability in Pakistan is exacerbated by deep political uncertainty. The February 2024 general elections, marred by allegations of fraud, have only widened divisions within the country. The exclusion of the Pakistan Tehreek-e-Insaf (PTI) party from the electoral process led to widespread protests, further eroding the legitimacy of the ruling Pakistan Muslim League-Nawaz (PML-N) coalition. The government, under Prime Minister Shehbaz Sharif, has struggled to implement necessary reforms amid the political chaos.

Former Prime Minister Imran Khan, the leader of PTI, has been imprisoned since August 2023 after being convicted in the “Toshakhana” case, further destabilizing the political landscape. His imprisonment has sparked widespread protests, with PTI supporters taking to the streets to demand his release. Meanwhile, the military’s historical influence in Pakistan’s politics has continued to cast a long shadow over the civilian government, often limiting its ability to enact meaningful reforms.

The political turmoil has also had a direct impact on Pakistan’s economic policy-making. Amid growing unrest, the government has had to delay critical reform measures that are essential for meeting IMF conditions, leading to delays in the approval process for the latest bailout. These political challenges, coupled with the country’s economic vulnerabilities, have raised concerns about Pakistan’s long-term stability.

Path Forward: Reforms, Debt Relief, and External Assistance

To address the mounting debt crisis, Pakistan’s government has undertaken several measures to boost tax collection and cut non-essential expenditures. Finance Minister Muhammad Aurangzeb has reiterated his commitment to meeting the IMF’s revenue targets by introducing new taxes and enforcing stricter compliance. However, the effectiveness of these measures remains in question, as much of Pakistan’s economy operates in the informal sector, where tax evasion is rampant. In 2022, only 5.2 million people filed income tax returns in a country of 236 million, a telling statistic of the challenges ahead.

Additionally, the government has placed heavy reliance on debt rollovers from bilateral lenders such as China, Saudi Arabia, and the UAE to meet its financing needs. For fiscal year 2024-25, Pakistan aims to roll over $16.4 billion of its maturing $26.4 billion in external debt. While this strategy may provide short-term relief, it is not a sustainable solution to Pakistan’s broader debt problems.

Experts argue that Pakistan’s long-term economic stability will require a comprehensive reform agenda that addresses its structural weaknesses. These include reducing its reliance on energy imports, improving its tax collection system, and reforming its power sector. Furthermore, the government must prioritize social spending to reduce poverty and inequality, which have worsened in recent years due to austerity measures and rising inflation.

Conclusion: An Uncertain Future

Pakistan’s debt crisis has become a multi-dimensional problem that requires coordinated action from both domestic policymakers and international financial institutions. While the IMF’s latest bailout provides a lifeline, it is unlikely to resolve the country’s deeper structural issues without significant reforms. At the same time, Pakistan’s political instability complicates the path forward, making it difficult for the government to implement necessary changes.

The country’s future hinges on its ability to break free from the cycle of debt dependence and enact meaningful reforms that promote sustainable growth. Without these measures, Pakistan risks sliding further into economic turmoil, with severe consequences for its people and the broader region.

Photo source: Google

By: Montel Kamau

Serrari Financial Analyst

11th October, 2024