Pakistan’s Bailout Package Put On Hold By IMF – Free PDF Download

What has happened?

• With Pakistan in political turmoil, the economic woes of the country have multiplied manifold.
• The International Monetary Fund’s $6 billion programme has been stalled, with no possibility of the next tranche’s approval in the ongoing month.
• Now, Pakistan will have to manage $5 billion as a bridge financing gap till June to avert a full-fledged balance of payment crisis and manage depleting foreign currency reserves in case the programme continues to be on hold.

What is this bailout package?

• In July 2019, Pakistan and the IMF reached a staff-level agreement on economic policies for a three-year Extended Fund Facility (EFF).
• Under the agreement, Pakistan was to receive about $6 billion for a period of 39 months.
• The IMF had pledged to provide support under the EFF programme when Pakistan’s economy was in a critical stage and badly needed assistance to meet the balance of payments challenge.
• The IMF provides EFF loan facilities to a country facing serious medium-term balance of payments problems because of structural weaknesses that require time to address.
• Compared to assistance provided under the standby arrangement, assistance under an extended arrangement features longer programme engagement – To help countries implement medium-term structural reforms – and a longer repayment period.

But why Pakistan needed IMF’s help?

• After coming to power, Khan has reached out to Saudi Arabia, the United Arab Emirates (UAE), and China for help.
• Riyadh pledged $3 billion in balance of payments support in October 2018, and the UAE supported Pakistan with another $3 billion in December.
• In February 2019, China extended $3.5 billion in loans and grants to bolster Pakistan’s forex reserves.
• But all this has not helped in addressing the problem, which requires medium-term structural overhaul.

13^th package

• This is the IMF’s 13th bailout package for Pakistan in the last three decades.
• While Pakistan’s economy typically witnesses a boom-bust cycle, over the last 10 years, its need for financial support from the IMF has coincided with the completion of a particular government’s term.
• The latest programme, after the agreement, had remained largely off track, resulting in disbursements of only $2 billion in two years.

• Islamabad had accepted the IMF’s conditions to reduce the primary deficit to 0.6%, granting more operational autonomy to the SBP, placing a flexible exchange rate and further tightening the monetary policy.
• Pakistan had also already accepted two conditions of the IMF. It increased the electricity prices by Pakistan Rupees Rs.1.68 per unit or up to 14% and also jacked up the petroleum products prices to the new historical level of Pakistan Rs.137.79 per litre.

So what has happened now?

• It is important to note that Pakistan and the IMF were recently holding talks for the completion of the outstanding 7th Review and release of $960 million tranche, which now seems impossible to be accomplished in this month.
• “The IMF looks to continue its support to Pakistan and, once a new government is formed, we will engage on policies to promote macroeconomic stability and enquire about intentions vis-a-vis program engagement,“
• IMF’s Resident Chief, Esther Perez Ruiz said while maintaining that there were no plans to suspend the programme.

• This uncertainty remains as Pakistan’s precarious financial condition under the Imran Khan government continues.
• The two sides have failed to reach a consensus amid the country’s budget deficit and current account deficit.
• Last month, Pakistan’s former finance minister and well-known economist Dr Hafeez disclosed that the current account deficit was heading towards a historic record by touching the $20 billion mark.

consequence

• After the IMF programme hit the roadblock, Pakistan’s other creditors like the World Bank and The Asian Development Bank stopped the budgetary support and
• Attached approval with the IMF’s letter of comfort, the website reported.

conclusion

• This is not the first time when Pakistan has faced such a challenge.
• Ahead of the 2018 elections, the IMF had told Pakistan they would negotiate deal with the new government.
• Then finance minister Shamshad Akhtar had to manage $2 billion from China to meet the balance of payment conditions.
• According to the The News, the foreign currency reserves are dwindling and now stand at a meager $12.04 billion as of March 25.
• The balance of payment crisis will be knocking at the doors during the elections if the current account deficit continues to escalate.

Q) The Capital account of the Balance of Payments includes which among the following transactions?

1. Changes in foreign exchange reserves
2. Investments to and from abroad
3. Borrowing and lending to and from abroad
4. All of the above

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