Deepening economic crisis in Pakistan as IMF bailout falters and textile industry struggles to survive

Pakistan’s dwindling economy is facing major crises as the recently finalized $7 billion loan deal with the International Monetary Fund (IMF) has gone awry, and reports claim that the local textile industry is facing an almost shutdown situation due to rising energy prices and borrowing limitations.

These two developments have put more pressure on the ruling government in Islamabad to seek emergency measures to somewhat stabilize the economy and avoid default. Experts believe that Pakistan will now have to either renegotiate the IMF deal or introduce additional taxes, which will have serious repercussions on the economy and the daily livelihoods of the people. Moreover, the Pakistan military’s attempts to stabilize the economy through the Special Investment Facilitation Council (SIFC) have failed to garner any foreign investments in the country. The deteriorating security situation and growing chances of the IMF deal’s failure will also impact the China-Pakistan Economic Corridor (CPEC), further creating tensions between China and Pakistan.

To get the IMF loan approval, Pakistan’s federal government agreed to several tough conditions and overly committed on behalf of the four provincial governments, which are also struggling to meet demands soon after the deal became effective last month. The official statistics for the first quarter (July-September) revealed that everything has gone off the mark, from Pakistan’s Federal Board of Revenue’s (FBR) tax collection target to provincial cash surpluses. Deputy Prime Minister of Pakistan, Ishaq Dar, has also publicly spoken against the market-determined exchange rate regime, which is another core objective of the USD 7 billion Extended Fund Facility.[1]

The IMF is pressuring Pakistan to let the rupee further devalue; however, according to Dar’s views, the rupee is already undervalued by at least 16 percent. Interestingly, Dar still decides Pakistan’s economic policy despite Muhammad Aurangzeb being the country’s current finance minister. This demonstrates the complete lack of political accountability in Pakistan, which cannot survive without an IMF bailout.

Notably, the new loan is the 24th IMF loan for Pakistan, with the country already owing the international financial body USD 7 billion. It illustrates that neither the IMF nor the various Islamabad leadership has seriously addressed structural economic issues in Pakistan.[2] Meanwhile, multiple IMF loans have put Pakistan under increasing debt pressure and subjected it to additional penalties for not fulfilling the conditions of these financial loans. Pakistan accepted about 40 conditions in return for the USD 7 billion deal.[3] Under the new 37-month loan program, the IMF pushed for additional tax measures equal to 3 percentage points of Gross Domestic Product (GDP) and the abolition of exemptions.[4] Reports indicate that, except for GDP growth, the other three independent growth indicators – inflation, imports, and large-scale manufacturing – fell short in the first quarter of the financial year, which started in July.

The contingency measures that the IMF has finalized in case of missing the tax target would further impede Pakistan’s economic growth and lower the home-take incomes of most taxpayers. Furthermore, the center-province divide in the country has aggravated the economic crisis in Pakistan, as the provincial governments could not show the required cash surpluses of PKR 342 billion and fell short of the target by PKR 182 billion in the first quarter.[5] This would further dent the primary budget surplus goal of the IMF deal.

Commentators believe that the deal was done in haste without properly consulting the provinces and financial experts, as the key motive behind the deal was political rather than economic. Consequently, the IMF deal is facing serious implementation challenges even sooner than many had predicted, underscoring how poorly it was negotiated by Pakistan.

Islamabad will now be deliberating on how to repay external debt amidst reports of the failure of the IMF deal. In September, Pakistan’s external debt stood at over USD 130 billion, with nearly 30 percent owed to China, its closest ally. Moreover, the country will repay almost USD 90 billion over the next three years, with one major payment due by December. The IMF strictly instructed Pakistan to obtain assurances from its main lenders, such as China, for rollovers or postponement of their debt payments to secure approval for a new 37-month loan program. Pakistan has utilized the IMF to repay Chinese loans in the past. Consequently, the IMF exercised extra caution this time and delayed the loan approval for three months until Pakistan convinced China regarding the debt repayment issue.[6]

In addition to the possible failure of the IMF deal, Pakistan’s smaller textile companies are curtailing production or selling assets to pay debts after high energy and borrowing costs have hurt businesses. Pakistan’s economy pivots around two essentials: textiles and energy, because 60 percent of its exports consist of textiles, while 30 percent of its imports comprise energy.[7] Many people believe that the textile industry in Pakistan could have had the potential to reach USD 50 billion by 2030; it is now fighting for survival amidst decades of negligence combined with the exponential rise in natural gas and electricity prices over the past 18 months.

While the industry has been suffering for years, new reports indicate that it is in the last stages of survival unless emergency measures are taken to save it.[8] Importantly, textiles provide employment to 40 percent of the manufacturing workforce in Pakistan, which amounts to 4.672 million people and contributes 8.5 percent to the GDP. However, the textile sector is now plagued by several challenges, the foremost being rising production costs, which are particularly rooted in the double jeopardy of not only a lack of reliable fuel supplies but also higher prices.[9] With the looming failure of the IMF deal, increasing fuel prices, and unbearable taxes on the manufacturing industries, Pakistan is heading toward default and millions of job losses. All this may also lead to delays in CPEC projects and possible violence against the government.

Sources:

[1] https://tribune.com.pk/story/2506450/7-billion-imf-bailout-falters-as-economy-strains

[2] https://www.brettonwoodsproject.org/2024/07/pakistans-debt-crisis-fuelled-by-more-imf-loans/

[3] https://www.usip.org/publications/2024/09/will-imfs-7-billion-bailout-stabilize-pakistans-economy

[4] https://www.aljazeera.com/news/2024/9/25/imf-approves-7bn-funding-agreement-for-pakistan

[5] https://tribune.com.pk/story/2505133/punjab-breaches-imf-condition

[6] https://www.aljazeera.com/news/2024/9/11/uncertainty-looms-as-pakistan-awaits-imfs-approval-of-7bn-bailout-package#:~:text=In%202019%2C%20the%20then%2DPrime,deposed%20through%20a%20parliamentary%20vote.

[7] https://www.brecorder.com/news/40281203

[8] https://www.bloomberg.com/news/articles/2024-10-29/pakistan-s-textile-firms-struggle-with-energy-borrowing-costs

[9] https://tribune.com.pk/story/2473363/mayday-call-for-textile-sector

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