The promise of a three-year, $6.7 billion International Monetary Fund loan comes none too soon for cash-strapped Pakistan. The country’s central bank says its foreign-exchange reserves have run down so fast — they have shrunk 42% so far this year, to $5.2 billion as of the end of August — that they can only cover less than two months of imports. A struggling economy hobbled by energy shortages, infrastructure bottlenecks and a Taliban insurgency in the northwest means there is scant hope that the government of new prime minister Nawaz Sharif will be able to rebuild its reserves by its own accord anytime soon.
The IMF’s cash, of which $540 million will be disbursed immediately, comes with strings attached. The government will have to enact growth-generating reforms, cut its deficit and improve tax collections. Tax evasion is so rife that Pakistan has one of the world’s lowest tax collected-to-GDP ratios in the world at 10% (For the U.S., by comparison, the ratio is 25%). Further disbursements of the new loan will depend on progress towards meeting those conditions being demonstrated. An earlier $11.3 billion IMF loan intended to avert a balance-of-payments crisis in 2008 expired two years ago mostly undrawn down after the conditions attached to it weren’t met.
Pakistan’s economy is expected to grow by less than 4% this year, despite the central bank cutting interest rates to boost growth. However, significant inflationary pressures constrain it from further cuts, and the structural problems would overwhelm any relief that tweaking monetary policy might provide. No recent government has proven effective at dealing with the country’s energy infrastructure problems or at managing the public finances efficiently, leaving the economy dependent on aid from multilateral institutions like the IMF and the Asian Development Bank and from the U.S., as well as on Chinese investment.
The challenge for Nawaz Sharif in breaking that cycle will be to get central government’s writ to run large at the provincial level. That will be especially necessary when it comes to the more controversial economic reforms on trade and energy, including phasing out power subsidies, that the government is proposing. These are now also IMF loan conditions, as are getting the provinces to expand their tax bases and limit spending.
That in turn will require cutting through the political and institutional corruption and cumbersome bureaucracy that bedevils both the county and its public sector enterprises. Nawaz Sharif will not be the first prime minister of Pakistan to struggle to achieve that, even if the IMF’s loan buys him some time to try.