As Pakistan moves towards another IMF bailout, more misery looms ahead for its people 

Islamabad is gearing up to implement tougher austerity measures in the hopes of accessing stalled IMF loan disbursements even as people in the country are facing food shortages and record levels of inflation 

January 27, 2023 by Tanupriya Singh
Pakistan IMF bailout
(Photo: @AWPSindh/Twitter) 

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Almost all of Pakistan awoke to darkness on the morning of Monday, January 23, as the country experienced its second major power outage in four months. Energy Minister Khurram Dastgir Khan announced that “unusual voltage and frequency fluctuation” had caused a widespread breakdown in the national grid. 

The outage was caused by a disruption in the power generation units, which the government was shutting down at night when the demand for electricity was relatively lower, as an “economic measure” amid a looming energy shortage

The fallout from the outage was dramatic—affecting not only water supply systems and hospitals, but also economic activities. Shahid Sattar, the secretary general of the All Pakistan Textile Mills Association, told AFP that 90% of factories had shut down on Monday, causing an estimated loss of $70 million. 

Textiles amount to about 60% of Pakistan’s total exports and, as such, are a major source of foreign exchange at a time when the country’s reserves have sunk to critical levels. Imports of essential goods including fuel, medicines, and wheat have been placed in jeopardy, while millions of people across Pakistan are bearing the brunt of food shortages and soaring prices

A mounting debt crisis

Even as Pakistan’s flood-battered economy is teetering towards collapse, what is generating concern is the possibility that the country might default on its sovereign debt, with $23 billion in repayments due in 2023 alone. 

The administration of Prime Minister Shehbaz Sharif is pushing to shore up necessary funds, including a much-delayed $1.18 billion tranche from a bailout program with the International Monetary Fund (IMF). The government has even agreed to adopt tough fiscal measures, despite initial resistance. 

These will reportedly see a 30% hike in electricity prices and a drastic hike—as much as 60–70%—in gas prices. Inflation is also estimated to increase by another 5–10% from the present level of around 25%. 

After months of delays, the IMF’s Resident Representative for Pakistan, Esther Perez Ruiz, confirmed on January 26 that a delegation from the Fund would visit Islamabad between January 31 and February 9 to hold discussions for the ninth review of the loan agreement, which has been pending since September 2022, and is necessary to unlock further disbursements. 

Over the past two decades, Pakistan’s gross public debt is said to have soared by over 1,500%. 45% of Pakistan’s external debt is held by multilateral creditors and some 30% by public and private lenders in China, followed by others. 

In 2020, Pakistan was among the 76 countries deemed eligible for debt relief under the G20 Debt Service Suspension Initiative (DSSI), a mechanism that ended in 2021. The mechanism had allowed poorer countries to suspend their debt service payments so that they could divert funds towards their COVID-19 pandemic response. 

Multilateral and private creditors were notably not included in the DSSI, an issue consistently highlighted by China, which provided the largest share of debt relief under the mechanism. 

To make matters worse, credit rating agencies had also threatened to downgrade the rankings of countries like Pakistan that were trying to avail debt relief under the DSSI.  

The mechanism, which in any case did not provide any long-term debt relief or cancellation, was ultimately ineffective in achieving even its rather limited goals. In the case of Pakistan, only 9% of its debt payments were suspended. While the country has been able to reach some agreements to roll over its debts, the scale of the economic crisis in Pakistan, made worse by pending repayments, requires a concerted effort towards meaningful debt relief, and, importantly, one that involves all creditors. 

In 2019, the government led by former Prime Minister Imran Khan reached an agreement with the IMF for a $6 billion loan in what would become Pakistan’s 13th bailout arrangement since the 1980s. With a former World Bank official heading the ministry of finance, the program oversaw the implementation of drastic austerity in Pakistan, including cuts to social spending and subsidies. 

Disbursements under the bailout program have been delayed repeatedly, as the Fund waited for Pakistan to implement harsher measures. For the approval of a $1 billion tranche that had been stalled in 2021, the IMF targeted the State Bank of Pakistan (SBP), ostensibly pushing for its “autonomy,” but in effect severely undermining Pakistan’s sovereignty over its own institutions. The State Bank (Amendment) Bill was approved by the Upper House of parliament in January 2022. 

While mainstream political parties and successive governments have tended to place blame for the economic conditions on one another, chiding each other for corruption, overspending, and “begging”, this rhetoric fails to address the roots of the recurrent crisis. 

The roots of the crisis, instead, include a predatory international financial system that has exploited Pakistan’s economic conditions to push whole-scale privatization and liberalization, as well as the interests of not only the national political and military elite but also of transnational capital, which have all stood to benefit in this process. 

The neoliberal bandaid 

“Pakistan is somewhat overdetermined by a powerful army, which in economic terms has meant persistently high levels of defense spending, and, in some more intangible ways, a subsidized military corporate empire,” Dr. Aasim Sajjad Akhtar, a professor of political economy at Islamabad’s Quaid-i-Azam University and the deputy general secretary of the Awami Workers’ Party (AWP), told Peoples Dispatch. “So, nominally private companies are operating with high levels of hidden subsidies and preferential contracts, and there is also the use of state power to engage in land and resource grabs.”

“This is both a cause and a consequence of a longer-term development trajectory, where there has been limited industrialization, a greater vulnerability to outside shocks, and a huge increase in imports over the past 15–20 years.”

Akhtar further explained: “Even when there is industrialization, or manufacturing units, there is a heavy compradore tendency—basically subcontracting for multinational corporations. There is also the issue of financialization, with an emphasis on real estate and quick return sectors with very limited employment effects. All of this ultimately results in high levels of indebtedness.”

While debt accumulation in Pakistan can be traced back to the 1970s, the history of IMF and World Bank intervention also shares a similarly long trajectory—the country has spent over three of the past four decades under some sort of IMF arrangement. Much of the international “aid” it has received has been in the form of loans, something that did not change in the aftermath of the 2010 floods, nor the floods in 2022

The era of structural adjustment oversaw the increase of overall taxes for the poorest households, while taxes on the rich actually declined. The 1990s witnessed massive liberalization and disinvestment, and the privatization of industrial units—the majority of which were simply asset-stripped and then collapsed. 

Only about 10% of the gains made through this process went towards poverty alleviation, with the rest spent on debt servicing. By the 2000s, around 600,000 workers were estimated to have lost their jobs due to these disastrous measures. Even as past budgets have hiked taxes that would disproportionately impact poor households, the very same documents have cut taxes on corporations and boosted defense funding. 

At present, 50% of the country’s national budget is consumed by debt servicing, followed by the 26% that is spent on defense. 

“There is a militarized ruling class which is unwilling to check its own interests, and politically is consistently in power, at most engaged in palace intrigues between one faction or the other. But none of them are actually interested in naming or redressing the long term causes of economic distress,” Akhtar said.

“There is persistent rent-seeking and elite capture, which includes foreign donors and investors, with the neoliberal rollback that followed the high-point of South-South cooperation in the 1960s and 70s, and then debt was used as a tool of discipline with the structural adjustment programs, liberalization, and privatization. Some 30 to 40 years later, it is quite clear that this set of policies—with foreign investors at the very front of the queue to capture Pakistan’s markets and its resources, to take whatever manufacturing base there is and make it subservient to multinational interests—generates a deficit between what the country is earning and what it is spending.” 

Akhtar added further: “And then you have the IMF coming in and saying that reforms have not been implemented ‘properly enough.’ Such rhetoric is then also regurgitated by technocrats within the country, calling for policy measures that are ‘uninterrupted.’” 

This positions the IMF and foreign donors as completely innocent, Akhtar added. Not only that, it works to explain away the failures of neoliberal reform programs as mere failures of implementation, which in itself opens countries like Pakistan to even harsher forms of intervention, as will undoubtedly be visible in the Fund’s upcoming visit to Islamabad. 

Building a meaningful left alternative 

“The most prominent part of what happened after Imran Khan was ousted was that he started talking about the US and regime change conspiracy,” Akhtar said. Only there was no conspiracy, he argued: “the US has been a part of this ruling class nexus very openly since the beginning, not in terms of individual governments being kicked out, but in the influence that it continues to wield, that the IMF continues to wield…” 

While regional and global influences continued to inform political infighting among the ruling class, Akhtar added, “the majority of the people of Pakistan became irrelevant. The mainstream is basically a war between the right and the center right.” 

Yet, there is also a growing resistance, as different left-wing progressive forces in the country continue to organize protests against brutal economic conditions and the failures of the political elite to address the crisis. 

“Our objective is to create more of a mass base and also to popularize the kinds of broad policy shifts needed to break out of this impasse,” Akhtar said. 

A central part of this, he emphasized, was also challenging the uneven developmental logic across Pakistan—the center versus the periphery, with resource grabs and repression much more pronounced in the latter, but with also more pronounced progressive discourses. 

“How do you build a meaningful mass politics across such unevenly developed terrain, that is a big part of the economic landscape. This is a question that progressives are constantly having to cope with,” Akhtar said.