IMF deal: relief but no cause for celebration, says ex-SBP chief

WASHINGTON: The $7 billion agreement with the International Monetary Fund (IMF) will provide much-needed relief to Pakistan. However, experts caution that this is not a cause for celebration.

Murtaza Syed, a former acting governor of the State Bank of Pakistan, noted in a tweet that for this staff-level agreement (SLA) — Pakistan’s 25th with the global lender — to become official, the country requires financing assurances from its development and bilateral partners.

“This is Fund-speak for securing secret debt relief from China. It is wrong, incomplete, and dangerous,” he warned. “It is wrong because Pakistan’s debt problem is not a Chinese debt trap.”

Murtaza Syed, who now works for the Beijing-based Asian Infrastructure Investment Bank (AIIB), acknowledged that while Pakistan does have unsustainable debt, the foreign creditors are much more diversified. He pointed out that Pakistan owes more to multilateral development banks like the World Bank, IMF and the Paris Club than to China.

Former SBP acting chief says agreement incomplete because Pakistan needs debt relief from all its major external creditors

Comparing Pakistan to other countries facing similar debt stress, he argued: “We are not in the same boat as those where China is the main creditor.”

He explained that the IMF deal is incomplete because Pakistan needs debt relief from all its major external creditors, including multilateral development banks, bondholders, the Paris Club and China.

“On their own, our exposures to China are relatively mild, so it cannot solve our debt problems on its own. China is only one part of the larger pie,” he wrote.

“It is dangerous because it makes Pakistan vulnerable to geopolitics and merely kicks the can down the road, forcing an impossible level of austerity (requiring us to increase tax revenues by 1pc of GDP every year) that will kill economic growth and leave no space for reform,” he added.

Murtaza Syed argued that the deal is also dangerous for Pakistan’s external creditors, as this “extend and pretend game will only lead to bigger haircuts when the eventual reckoning comes”.

Noting that this pattern has been seen around the world time and time again, he argued that this is not just a China issue. “Pretending it is will only deliver partial debt relief.”

He warned that the new arrangement with the IMF would still require impossible austerity and invite social turmoil: “The stakes are high. And the hour is getting late. Let us hope all stakeholders can read the room.”

He claimed that the IMF knows from its experiences that it is far better to bite the bullet now and organise a coordinated debt relief package involving all creditors doing their fair share. This happened in 2000 and “must happen again, and we mustn’t waste it again,” he added.

Michael Kugelman, a scholar of South Asian affairs at Washington’s Wilson Center, noted that while endorsing the plan, the IMF praised Pakistan’s “hard-won macroeconomic stability achieved over the last year”.

He observed that for Islamabad, Friday “started with a blow dealt by the Supreme Court and ended with a boost provided by a critical donor”.

Akbar S. Zaidi, Executive Director at the Institute of Business Administration (IBA), wrote that the IMF package is nothing to celebrate, as “it is a recognition of our failures. We are constantly failing by going to the IMF again and again”.

Reporting on the agreement, The Financial Times (FT) noted that “Pakistan has suffered one of Asia’s worst recent economic crises,” with the country of 240 million teetering on the brink of default last year before the IMF granted a short-term $3bn rescue package.

“Inflation surged as high as 38 per cent as Islamabad struggled to bring down a ruinous debt burden, which swallowed 57pc of government revenue in interest payments,” FT noted.

Published in Dawn, July 14th, 2024