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May 13, 2019 | 21:15 GMT

3 mins read

Pakistan: The Political Cost of Islamabad's New IMF Loan

The Big Picture

After months of negotiation, Pakistan's faltering economy received a lifeline May 12 after Prime Minister Imran Khan’s government secured the country's 22nd loan from the International Monetary Fund. But while this latest tranche of funding will help Islamabad stave off an economic crisis in the short term, the tough austerity measures tied to its disbursement over the next three years risk spurring unrest that could undermine Khan's political support. 

 

What Happened

Pakistan's government clinched a multibillion loan May 12 from the International Monetary Fund (IMF) to help mitigate the country's low foreign exchange reserves, as well as its steep fiscal and current account deficits. The new three-year Extended Fund Facility arrangement includes a $6 billion loan that will be disbursed over 39 months, contingent upon Islamabad enacting tough structural reforms. Such austerity measures include hiking fuel and electricity prices; rescinding $4.9 billion in tax exemptions over two years; and further raising interest rates while allowing the rupee to weaken as part of a free-floating exchange rate. 

Why It Matters

The latest IMF agreement fits into the Pakistani government's broader external funding effort that involves loans from partner countries including China, Saudi Arabia and the United Arab Emirates, as well as other lenders such as the World Bank. In the short term, the loan will ensure Islamabad meets its debts amid the country's economic slowdown, which will in turn help Khan's administration court vital foreign funding by bolstering investor confidence. 

While the IMF loan will help Islamabad stave off an economic crisis over the next three years, the austerity measures tied to its disbursement risk undermining Khan's political support.

But the IMF's loan is tied to austerity measures that will force Khan to take unpopular decisions to raise revenue — weakening his ability to deliver on his pledge of creating a welfare state to cater to the country's poor. As a result, the specter of social unrest will rise and could pose a formidable challenge to the government in the coming months — especially if protests gain critical mass. 

Background

South Asia is currently the world's fastest-growing economic region. However, Pakistan has continued to lag far behind its peers, with a $305 billion economy characterized by recurrent boom-and-bust cycles that culminate in the need for bailouts. During the latest fiscal year ending in June 2018, economic expansion registered the largest growth in 13 years at 5.2 percent. But that rate is now projected to fall to 2.9 percent in the next fiscal year due to cuts in development spending and public investments in recent months, and due to interest rate hikes and the depreciating value of the rupee. 

Aided by heavy government spending ahead of the July 2018 elections, the consumption-driven nature of Pakistan's economic expansion last year has caused inflation to rise in recent months. This has fueled even more demand for imports that the country's export growth has failed to keep pace with — leaving Islamabad little choice but to finance its deficit by taking out more loans, adding to the government's debt burden. 

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