Pakistan Inches Closer to IMF Loan After Saudi Arabia Comes to Its Rescue

Saudi Arabian and Pakistani officials sign deal formalizing investment in hydropower project and $2 billion credit line. Source: APP

Saudi Arabia greenlighted a $2 billion payout to Pakistan on Thursday, April 6, which will be a crucial step toward Pakistan securing International Monetary Fund (IMF) aid. Saudi Arabia has also pledged an additional $240 million to construct a hydroelectric power project, helping Pakistan reduce its energy imports. This comes amid Pakistan facing soaring inflation, depleting foreign exchange reserves, and a massive slowdown in growth, leaving its economy in dire straits. 

IMF representatives and the Pakistani government have been hashing out terms for releasing funds, which the IMF has delayed handing out since December after the debt-ridden nation could not stick to the stipulated austerity measures. The IMF has now ordered Pakistan to get funding from allies to close the deficit in its balance of payments, impose higher tax slabs, and pull the plug on subsidies before it resumes its aid. The timing could not have been worse for the Shehbaz Sharif-led government as the IMF requirements increase the burden on Pakistanis who are already grappling to make ends meet as the country goes to polls by year-end. 

The economic crisis, however, has been several years in the making. During the pandemic, former Prime Minister Imran Khan sanctioned fiscally irresponsible welfare schemes, including a $709 million food subsidy. Pakistan’s escalating expenditure on the military has also been a huge source of contention—according to the 2022 budget, Pakistan allocated over $5.3 billion on defense spending out of a $30 billion budget. The appreciation in the valuation of the US dollar during the pandemic, along with the increase in fuel prices from the Ukraine war, caused Pakistan’s imports to skyrocket. To make matters worse, in August last year, Pakistan faced an apocalyptic flood that killed more than 1,700 people and left behind a massive trail of destruction — more than $30 billion were wiped out of the economy, and approximately 80% of the summer crops were destroyed leading to agrarian distress and driving up prices of staples.

People in Karachi wait in queues to get water after the flood destroys water pipelines making safe drinking water inaccessible for many. Source: Fareed Khan/AP

Besides the economic front, Pakistan’s internal politics has taken a turn for the worse with heightening political animosity detracting foreign investors. Late last year, political opposition leader Imran Khan launched a long march from Punjab to Islamabad, immobilizing parts of the country to pressure the government to hold early elections. During one of his rallies, Khan faced an assassination attempt which he alleged the government and the Pakistan army had orchestrated. With Imran Khan’s soaring popularity and the impending elections, there is already speculation that the tensions between the army and Khan signal instability in the years ahead.

Pakistan also has a growing militancy problem. With the Taliban coming to power in Afghanistan, the Tehrik-i-Taliban Pakistan, responsible for acts of terror across the country, has become more emboldened, posing a considerable security threat.

Pakistan’s successful diplomatic positioning, including its balancing act between the US and China, has been instrumental in helping it tide over its economic predicament. Both superpowers attempt to bring Pakistan under their influence, with China extending a $700 million credit line and a ‘rollover’ on a $2 billion loan and the US committing $82 million for the coming fiscal year. The aid from the IMF, which is now on the cards after Saudi Arabia’s pledge, will significantly ease the short-term burden on Pakistan, giving the government more legroom to maneuver the economy out of its crisis.