8 July 2019
Author: Michael Kugelman, Wilson Center
Last month, the International Monetary Fund (IMF) announced a staff-level agreement for a new three-year, US$6 billion bailout package for Pakistan. If the deal is finalised as expected, this will be the 13th time in the last 30 years that Pakistan has received an IMF assistance package.
IMF loans are always a delicate matter in Pakistan. This is not because of any embarrassment about having to ask for external support to stabilise a flailing economy (Pakistan has frequently, including in recent months, requested and received new funding from Saudi Arabia, China, and the UAE). Rather, IMF programs are a sensitive issue in Pakistan because of the austerity and other politically risky measures typically demanded by them.
For the current Pakistani government led by Prime Minister Imran Khan, the political risks of a fresh IMF package are particularly high.
The ruling Pakistan Tehreek-e-Insaf (PTI) party — which took office less than a year ago — casts itself as a breath of fresh air for Pakistan’s political environment. Above all, it projects itself as a party that abjures corruption and dynastic politics, two hallmark features of the two political parties that have run Pakistan’s government during most years of civilian rule.
This emphasis on bringing something new to Pakistani politics — the PTI trumpets the slogan of ‘Naya (New) Pakistan’ — has included repeated denunciations of foreign loans. Khan himself has long been a critic of the IMF and of external loans in general. When he was an opposition figure in 2015, he declared: ‘I will prefer death over a begging bowl! Let me assure; Imran Khan will never beg in front of any superpower’.
In an address to the nation soon after he took office, he proclaimed that ‘we need to stand on our own feet. Taking loans means losing freedom and respect.’ He added: ‘Our leaders ask for money from one or the other, IMF — No country can pro[s]per in this way.’
On the campaign trail and in his early days as premier, Khan vowed to build an Islamic welfare state — one that would entail, among other things, building five million new housing units and combating poverty.
In effect, Khan and the PTI have taken strong positions against external loans and for social welfare. More than any other Pakistani political party in recent years, the PTI has pitched itself as a new and populist alternative dead-set against dependence on external financing.
Little wonder, then, that during its first few months in power, the government put off the IMF option. PTI insiders repeatedly described the IMF as a last resort. Instead, the government pitched a series of populist but ultimately insufficient — not to mention infeasible — measures. These ranged from crowdsourcing the Pakistani diaspora for economic support to vowing to recover the wealth plundered overseas by corrupt politicians from other parties.
Khan’s government has now succumbed to a cold, hard reality: after being unable or unwilling to heal the sick economy that it inherited from the previous government, it has little choice but to administer the shock therapy of an IMF loan. Pakistan is suffering through a serious balance of payments crisis and its foreign reserves can’t even cover three months of imports.
In essence, the ruling party that once promised an Islamic welfare state and ample social sector spending must now settle for austerity measures demanded by an international financial institution that the government had long sought to avoid.
To be fair, Islamabad’s aforementioned acquisition of new financial support from three bilateral partners means that the scale of the IMF package won’t be as large as it might otherwise have been, blunting some of the political fallout for the PTI.
But this IMF loan will still be a bitter political pill to swallow. And to its credit, Islamabad has not made excuses. It has been strikingly honest in acknowledging the risks. ‘With the IMF, there will be an impact on the government not fulfilling its election promises,’ admitted Farrukh Saleem, then a government spokesman, in an interview with the New York Times in October. ‘But welcome to the real world.’
Assuming the loan is finalised, Islamabad will confront an immediate challenge in its public messaging. It will need to put a positive face on the IMF program — perhaps by emphasising that painful short-term steps are imminent, but in the end these measures will stabilise the economy and enable the government to start implementing its long-promised social welfare plan.
Still, those painful measures will be tough to sell, no matter how short term they may be, to a nation experiencing considerable economic distress.
This much is clear: Just 10 months into its term in power, the honeymoon is over for Pakistan’s new government. It faces a big political test.
Michael Kugelman is Deputy Director for the Asia Program and Senior Associate for South Asia at the Woodrow Wilson International Center for Scholars in Washington, DC. He is grateful to Wilson Center research intern Hamna Tariq for her assistance with this article.
The article was published in the East Asia Forum on 18 June 2019