Why is Pakistan asking for a loan from the IMF?

Pakistan’s Prime Minister Imran Khan has given a nod to the Ministry of Finance to start negotiations with the IMF for what could be the largest loan the country has ever taken from the global lender. 

The rupee, Pakistani currency, lost more than seven percent on Tuesday as the deal with the IMF became apparent. 

Panic gripped people and they began to buy foreign currency to protect savings in expectation of a weaker rupee, which the IMF considers to be overvalued. 

Rising foreign debt, widening trade deficit and depleting foreign currency reserves have pushed Islamabad to take such a desperate step. 

Khan’s government, which came to power just two months ago, was hoping for a bailout from friendly countries including Saudi Arabia. Since no help came from them, Khan was left with no option but to reach out to the IMF.

Finance Minister Asad Umar is expected to hold talks with IMF officials later this week in Indonesia.

Here's some facts

If granted, it’s going to be the largest loan for Pakistan

Reports pegged the loan at $12 billion, an amount needed to avert an immediate economic crisis. 

That would make it the 13th and the largest IMF loan Pakistan will receive. Previously. the IMF has bailed out Pakistan on 12 occasions.

Last time it took a loan from the IMF was in 2013 when the previous government of Nawaz Sharif received $6.6 billion. 

The IMF funds are disbursed in installments over a three-year period and the recipient country is generally asked to introduce tough austerity measures in return. 

What prompted Pakistan to seek IMF’s help? 

Pakistan’s foreign currency reserves, mainly the US dollar holdings of its central bank, have dropped to $8.4 billion, barely enough to pay for two months of imports. 

Trade deficit, the difference between how much the country spends on imports versus its earnings from exports, has widened in recent years. In the fiscal year which ended last June, exports were $23.22 billion while imports exceeded $60 billion. 

A substantial chunk of foreign currency goes to paying for oil and gas imports. Pakistan’s reserves have come under added pressure with the rise in oil prices in recent months. 

Exports depend on the textile manufacturers, who have struggled to compete with cheaper products from Vietnam, China and Bangladesh.

What would IMF want from Pakistan in return?

IMF loans come with conditions that include a push to cut spending and discourage consumption. 

A delegation of IMF officials, which had gone to Pakistan recently for routine consultations, had welcomed a government proposal of “a large increase in gas tariffs, closer to cost recovery levels, and the proposed increase in electricity tariffs.” 

Increase in energy prices, which have a cascading impact on prices of products across the economy, would be challenging for Khan’s government, which rode to victory on the promise of making things affordable. 

But industry executives say the IMF does not offer a remedy to Pakistan’s ailing energy sector.

“The real problem is corruption and mismanagement. I believe we lose around $5 billion annually because of power theft in the energy supply chain. No increase in prices is going to solve that problem,” says Javed Mehmood, former CEO of Hubco, one of the country’s largest electricity generating companies. 

The IMF has also been pushing for privatisation of loss-making state-run companies such as Pakistan International Airlines (PIA), something that previous governments have struggled to do. 

Has China anything to do with Islamabad’s fiscal woes? 

To some extent, yes. 

China plans to invest $60 billion in building power plants, roads and a port in Pakistan as part of the China-Pakistan Economic Corridor (CPEC) initiative. 

Work on some of the CPEC projects such as a massive coal mine and power plants in southern Sindh province is underway.

This has ballooned the import bill for equipment and machinery, most of which is being imported from China.  

There are also concerns both within and outside Pakistan that it is being dragged into a Chinese debt-trap as most of the investment is coming in the shape of loans. 

The United States, which has the largest voting power on the IMF board, has already said it wouldn’t want the IMF loan to be used to pay off Chinese debt. 

Islamabad’s relations with Washington are at their lowest in years. 

US President Donald Trump’s administration cut around $900 million in aid to Pakistan, which says the money is actually payment for repair of its roads used to transport goods for American troops stationed next-door in Afghanistan.