IMF approves $1.1bn bailout for Pakistan as economy falters

The IMF has authorized the disbursement of more than $1.1 billion to Pakistan, reviving a stalled $7 billion aid package that is expected to help despite a severe economic crisis and devastating floods to avoid payment defaults.

The IMF’s Washington board approved the spending after Prime Minister Shehbaz Sharif’s government introduced austerity measures, including soaring domestic fuel prices.

“The formal resumption of an IMF program is a major step forward in our efforts to get Pakistan’s economy back on track,” Sharif wrote on Twitter.

Antoinette Sayeh, deputy general manager and acting chair of the IMF’s Executive Board, said maintaining the reform measures is crucial.

“Strong implementation of corrective measures and reforms remains essential to restore macroeconomic stability, address imbalances and lay the foundation for inclusive and sustainable growth,” she said, including strengthening governance in state-owned enterprises.

But the unpopular austerity measures have proved politically dangerous at a turbulent time for the country of 220 million. Inflation has soared, with a basket of “sensitive” food and fuel prices rising 45 percent year-on-year last week. Floods have killed more than 1,000 people, affected more than 30 million people and destroyed rice and cotton crops.

Sharif’s arch-rival Imran Khan, who was ousted as prime minister in April as the economic crisis loomed, has surged in popularity and his Pakistani party Tehreek-e-Insaf has held vocal rallies urging immediate snap elections.

The government hopes that financial support from the IMF, China and Saudi Arabia will buy time for inflation to ease before elections, which are due in the second half of next year.

“I could understand why people wouldn’t be so enthusiastic, but my guess is that if I had defaulted this country – it would have defaulted two or three months ago – things would have been a lot worse,” said Miftah Ismail, Minister of Finance of Pakistan, he told the Financial Times in an interview.

The government can now “show the people of Pakistan that we are competent, that we know how to deliver,” he said before the payout was complete. “People will understand. . . that PTI brought us to the brink of insolvency and we bailed them out. But the economy must certainly pick up.”

Pakistan is one of several countries facing acute economic hardship following the global price surge following the Covid-19 pandemic and the Russian invasion of Ukraine. Among South Asian countries, Sri Lanka defaulted in May, and Bangladesh and Nepal are struggling.

Pakistan’s IMF program, one of a dozen since the 1980s, was negotiated under Khan in 2019 but has stalled multiple times as his government defied calls to implement unpopular spending cuts. According to Monday’s announcement, the IMF will lend about $4 billion to Pakistan next year.

But Islamabad’s external debt has skyrocketed, with full-year repayments rising to $24 billion from about $14 billion two years ago, according to research firm Macro Economic Insights.

Pakistani officials also expect Saudi Arabia to renew a $3 billion central bank deposit and Qatar and the UAE to invest about $3 billion and $1 billion, respectively, although analysts warned the timing of those spendings is unclear remains.

The loan commitments have done little to stem frustration among Pakistanis. “Life has become extremely expensive,” said Osama Abbassi, a chef in Islamabad and father of six. “I cook food for others that I just can’t afford for my family.”

The worst flooding in decades has clouded the economic outlook as torrential rains displaced hundreds of thousands of people in Sindh, Balochistan and Khyber Pakhtunkhwa, three of Pakistan’s four provinces.

Akram Khan fled his village in Khyber Pakhtunkhwa to Islamabad with his family last week. “Rain flooded our whole house overnight,” he said. “We narrowly escaped.”

Authorities said the floods could affect the country’s ability to recover and have appealed for international help, warning that the crop damage could fuel food inflation. “This is going to really hurt us,” Ismail said.

Investors also remain cautious. While government bonds have recovered from lows since Sharif’s government announced a tentative IMF deal last month, equities and the rupee remain volatile.

Sakib Sherani, head of Macro Economic Insights, argued that despite the IMF deal, rising debt obligations meant Pakistan could still potentially be forced into a debt reprofiling with the IMF. “We have a hump ahead of us in our foreign debt repayments over the next few years,” he said.

Sharif’s government wants time for its economic strategy to deliver results before calling elections, but critics said prolonging political uncertainty would hamper the recovery.

In contrast, Khan has mobilized his base with mass rallies that have ignited political tensions. The former prime minister is on bail after police charged him with terrorism-related offenses this month for allegedly threatening officials in one of his speeches.

“Economic stability in Pakistan is now linked to political stability. . . If I were an investor in this country, I would think twice,” said Ashfaque Hasan Khan, a former member of the PTI government’s Economic Advisory Council. “The only solution is a free, fair and transparent election as soon as possible.”

Sharif’s government has argued that elections would only serve to further destabilize the recovery. “Give us a few months,” Ismail said. “Things will get better but I understand that they are very difficult at the moment.”

But for the victims of the floods, many of whom have lost everything, there is little to look forward to. Khan shared a photo on his phone from a party two weeks ago at his now-deserted home to mark the birth of his son. That would be, he said through tears, “our last celebration ever”.