If not IMF, then what?

The ninth review of Pakistan’s International Monetary Fund (IMF) programme has become a bit of a running joke – even though, for the country, it is no laughing matter. 

Originally scheduled for November, the review is to release over $1.1 billion in critical funds. However, despite assurances from the government that the initial Staff Level Agreement will come soon, it shows no signs of arrival.

In the meanwhile, Pakistan’s current account situation remains precarious. 

There was a grandstanding by finance minister Ishaq Dar that Pakistan would have to work out alternative options if the IMF remained tough on Pakistan. What seemed to be a simple negotiating bluster is now being thought of as a possible outcome. Profit spoke to some analysts to find out if there were any alternative options. 

Well, the short answer is ‘no’.

Friendly countries?

One option quoted as a possible alternative was aid from friendly countries.

The first that comes to mind is China. Historically, Pakistan’s relations with China have been fairly amicable. The obvious reason behind this is China’s foreign policy of looking for trade and markets. So, China has poured a lot of money into Pakistan in the form of loans and grants. 

“China does this for countries that it thinks are too big to fail or in which the Chinese have already invested and have their investments at stake also,” said Ammar A. Malik, senior research fellow at Aiddata at William and Mary. Essentially, China’s investment in CPEC is at stake, in case Pakistan’s economy crashes and so even now Pakistan keeps receiving more loans. (Just recently) China released a tranche of $500 million. This loan, unlike other Chinese loans, is not project financing but is a deposit from China’s ICBC to Pakistan’s State Bank.”

He added: “These loans are part of the SAFE deposits, which have a maturity of one year. The borrower pays monthly interest and if the borrower is not in the condition to repay the loan by the 12-month mark, the same conditions are usually extended for one more year and more loan is given.” 

Essentially, what Pakistan is doing is buying breathing space. The country is taking long-term loans to meet its short-term financing gaps. The IMF has asked the country to fill the financing gap of almost $7 billion. Dar announced that ICBC has signed a loan of $1.3 billion, of which $500 million were released the same week. 

 But to assume that China will help Pakistan to avoid default is also not necessarily a sure bet. “Over the last decade, the Chinese have invested heavily in the Belt and Road initiative in many parts of the world. It is their coming out project across the developing world. On the one hand, giving Pakistan unilateral relief on CPEC loans could risk setting a precedent for its other debtors. On the other hand, it would be a shame for China if the BRI initiative is seen to have failed so early. These two considerations will have to be carefully balanced by the Chinese as more countries face repayment difficulties on BRI projects due to tightening global financial conditions” commented a China-based macroeconomic analyst who wishes to stay anonymous.

Then there is Saudi Arabia, which isn’t looking too sympathetic. Although Riyadh has helped with easing the liquidity crunch in the recent past, with $3 billion in September 2022, this time around help from the brotherly country may not come easy. 

At the World Economic Forum in January, Saudi Arabia’s finance minister Mohammed al-Jadaan made the kingdom’s policy very clear: “We used to give direct grants and deposits without strings attached and we are changing that. We are working with multilateral institutions to actually say we need to see reforms.” 

“We are taxing our people, we are also expecting others to do the same, to do their best. We want to help but we also want you to do your part,” he continued. 

This can be seen in Saudi Arabia’s refusal to hand out money to its long-Arab allies, such as Egypt, Morocco and Jordan. “Pakistan, which is far more dysfunctional than all of the others, should have seen it coming,” said Kamal Alam, a senior fellow at Atlantic Council, to Middle East Eye. 

At the start of this year in January, army chief Asim Munir visited Crown Prince Mohammed bin Salman and discussed the possibility of an added loan. Prime Minister Shehbaz Sharif and finance minister Ishaq Dar both have been suggesting that there is a green light from Riyadh about incoming help, but it hasn’t come yet. 

Experts believe that this treatment is because Saudi Arabia, like the IMF, wants to see reforms in Pakistan before it sends in any more money. “The kingdom would want to see tax reforms in Pakistan too; want to see reforms. There has been talk of investment in oil refineries, but negligible work has happened on it. With reforms, Pakistan will look like an economy where Saudis might want to invest,” said Khaqan Najeeb, former advisor to the ministry of finance. But the given economic situation in Pakistan, ridden by high inflation, high-interest policy, and limitation on imports, is not ideal for foreign investment. 

Once the deal with the IMF is signed, friendly countries who are interested to invest in Pakistan could feel more confident. But this is like a toxic spiral: While the IMF is expecting the narrowing of the external financing gap before it releases a tranche, it seems the expected loans from friendly countries will only come through when the IMF review is completed and the tranche cleared for release. 

So now what?

“We still have alternative options, but we need to expedite and put our house in order. Bilateral trade partners have all pledged financial assistance, but they would like to see how quickly Pakistan finalises its transactional structures. For example, if we are pitching OGDCL to Qatar for investment, they would like to see the structure of minority shares and governing structures. The same goes for LNG plants in the UAE. There needs to be due diligence in cleaning up and sorting the financial statements and fastening the process of inflow of money,” said Dr Vaqar Ahmed, deputy executive director at the Sustainable Development Policy Institute (SDPI).

“Similarly, almost $10 billion in program financing is pending from multilateral banks like ADB and AIIB just because the project proposal has to go to the provinces. So, the provinces must quickly fulfil the prior condition for the project to kickstart and package the transaction,” Ahmed continued. 

“The only realistic alternative is debt restructuring. This means admitting to all the bilateral lenders that the borrower cannot repay the debt. It calls for either reprofiling the debt (delaying the maturity period), reducing the rate of interest, or reducing the overall principal amount for the bilateral creditors. All the countries will receive equal treatment, no matter how much loan they have given. The IMF makes the debt sustainability analysis and states the terms of debt restructuring. In return, the creditors ask for a guarantee of following the sustainability plan in the form of reducing subsidies and inefficiencies to see that the borrower country will stand at a point where it can promise to be in a set number of years. If Pakistan declares default, the IMF will be able to provide guarantee support and settle on an agreement with the creditors. In such a case, the World Bank actually gives more loans to help rebuild the house,” explained Javed Hassan, a macroeconomist.

“The most important thing is to get the IMF deal done. Once that comes through, support from bilateral countries will also start flowing in. Right now, it’s important that Pakistan makes a smart plan for the next two to three years that focuses on exports so that it can generate foreign exchange to service its external debt. Most immediately, these exports should be those that are not heavily dependent on imports, such as IT and agricultural items. This will help attract investment from bilateral partners as well as convince creditors to offer some temporary debt relief, which is much needed,” said Murtaza Syed, former Acting Governor of the State Bank.

“Countries that get into a liquidity crisis, like Sri Lanka, afterwards hold hands with the IMF to move forward in the form of debt restructuring. One would like to see Pakistan complete this program and use the IMF as an anchor to move ahead out of the crisis. But the IMF is a necessary condition, but not a sufficient condition. A strong reform agenda is needed, based on local competitiveness and productivity,” said Khaqan Najeeb.