Pakistan Bulletin

An up-to-date and informed analysis of key issues of Pakistan.

Pakistan’s Perpetual Debt Crisis

August 2023

Distressed by economic meltdown and political crisis, Pakistan entered into its 23rd programme with IMF in July 2023. The article analyses how the country’s reluctance to undertake policy actions for macroeconomic stabilisation – an IMF prescription – keeps pushing it back into a never ending cycle of dependency on external creditors.

Pakistan entered its first IMF programme in 1958. The same time around the first martial law of the country was imposed. Since then, Pakistan has contracted 22 programmes with IMF. The present programme that started in July 2023 is the 23rd in the series. Can Pakistan’s economy survive without the IMF support? To answer this question, it is important to review the history of IMF lending commitments with Pakistan.
For 14 out of 23 IMF programmes, Pakistan was not successful in drawing all the amount committed by the IMF because of breach by Pakistani authorities on their committed policy steps. For eight programmes, Pakistan was successful in drawing all the committed amount. Most of these were short-term programmes like the present Stand-by Arrangement. Moreover, irrespective of whether Pakistan completed the programme successfully or not, it plunged into a crisis within a few years leading the country to seek a new programme and remain in a state of perpetual dependency on the IMF.

What this brief history shows that Pakistan always ran out of its fiscal prudence steam in a short period of time soon after or even during a mid-term programme. Loss of fiscal prudence put a strain not only on fiscal accounts, but also translated into widening of current account deficit that evaporated foreign exchange reserves slowly first, and rapidly later with the continuation of fiscal and monetary imprudence. The country’s citizens are all familiar with this story of reserves buildup and depletion accompanied by boom-and-bust cycles of growth with high inflation. Will the future of Pakistan be any different? Will it be able to get out of the IMF programmes and start relying on domestic resource mobilisation through tax revenues, economising on expenditures and export promotion?

Phasing out from IMF would require implementation of wide-ranging reforms in Pakistan. Fiscal and administrative reforms are needed to raise tax-to-GDP ratio and economising on expenditures.

What kind of policy actions are needed to reduce dependency on IMF or other external creditors? Most of these actions lie, ironically, in the macroeconomic stabilisation that is prescribed by the IMF. Stabilisation policies help a country move towards greater self-sufficiency by tightening financial belts and reducing fiscal and external deficits, thus paving the way for lowering debt in relation to the economy’s size. So, stabilisation is a move towards autarky, whether it is under a home-grown or IMF programme. It should, therefore, be clear that phasing out from IMF deals requires continuation of IMF-like policies. This is the foremost reason that it would be very difficult for the state of Pakistan to get rid of IMF because authorities despise macroeconomic prudence advocated by the Fund.
The current fiscal position of Pakistan is unsustainable. This can be understood easily by reviewing the actual consolidated data on fiscal affairs for the year 2022. Expenditure in the Fiscal Year 2022 was 19.9 percent of GDP (Rs. 13.3 trillion), of which interest payments were 4.8 percent of GDP (Rs. 3.2 trillion). In contrast, revenue was only 12.0 percent of GDP (Rs. 8.0 trillion). This leaves a fiscal deficit (revenue minus expenditure) of 7.9 percent of GDP (Rs. 5.3 trillion) for the country. In this state of fiscal affairs even the government expenditure excluding interest expenses, known as primary expenditure which stood at 15.1 percent of GDP (Rs. 10.1 trillion) was higher than revenues. This means that the government is also borrowing to meet its interest expenses. Whenever the primary deficit is higher than zero, government debt increases.
Clearly this is not a fiscally sustainable position. If this situation continues, debt will  further rise in future and at some point, the government will be unable to meet its debt servicing obligations, i.e. face default. Therefore, it is essential for the government to at least cover its primary expenditure fully and also generate a primary surplus, which will help bring down the debt-to-GDP ratio in future. Under these circumstances, irrespective of whether Pakistan is in or out of the IMF program, this is the only way to bring stabilisation and move towards self-sufficiency. This fiscal adjustment can be undertaken with a combination of raising revenue-to-GDP ratio and reduction in expenditure-to-GDP ratio. Can Pakistan increase domestic taxes from 10.1 percent of the GDP to 15.1 percent? If Pakistan wants to attain self reliance, the state must do this, otherwise there will be no end to the country’s dependency on the IMF.

Fiscal excesses by the government almost always spill over to widen the current account deficits. If the exchange rate is not managed properly, it plays havoc on foreign exchange reserves. Fascination of Pakistani authorities with fixed or overvalued exchange rate is well-known. This subsidises imports, penalises exports, promotes consumption, and depletes precious reserves.

Phasing out from IMF would require implementation of wide-ranging reforms in Pakistan. Fiscal and administrative reforms are needed to raise tax-to-GDP ratio and economising on expenditures. Meaningful reforms in state-owned enterprises are needed to end their fiscal burden and increase their productivity. Energy sector reforms are needed to eliminate the buildup of the circular debt. Civil service reforms are needed to enhance governance and efficiency. This is not an exhaustive list; reforms are needed in every sector of the economy. The weight of history is against Pakistan getting rid of the IMF. What is ironic is that all these things are doable.

Riaz Riazuddin


The author is a former Deputy Governor, State Bank of Pakistan.

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