IMF’s fiscal discipline for Pakistan questioned amid neglect of debt restructuring

July 23, 2024 (MLN): The International Monetary Fund (IMF)’s approach for Pakistan of strict fiscal consolidation, that is, cutting spending and increasing revenue, appears questionable considering the lender’s lost focus on debt restructuring.

Murtaza Syed, a former deputy governor of the State Bank of Pakistan (SBP) and ex-IMF official expressed this concern in his latest article titled “Debt Will Tear Us Apart (Again)”.

Earlier this month, Pakistan secured a staff-level agreement for a record 24th time with the IMF.

However, what Murtaza Syed highlighted is the absence of any mention of debt sustainability, which is both surprising and disappointing, given that in May the IMF came as close as it could to declaring Pakistan’s debt unsustainable.

This hints, that both Pakistan and IMF after considering it a severe burden are now somewhat backing away from this transparency.

Murtaza Syed has alarmed that the consequences of this “extend and pretend” gamble will probably be to be tragic.

“It will impose unbearable austerity on a population already laid low by stagnant per capita income over the past decade, a historic cost of living crisis and endemic political dysfunction,” the article reads.

It will lead to deeper losses for creditors when the inevitable reckoning comes, and will consequently further damage the already fragile perception and image of the IMF.

He further presented figures to identify how bad the debt situation is, as per which, Pakistan owes the world an average of $19bn in principal repayments or more than half of its export revenues.

It will also need a minimum of $6bn every year to finance the current account deficit forecasts, bringing total external financing needs to at least $25bn a year between now and 2029.

That’s not all. For each of the next five years, the government will need to pay an average of 6.5% of GDP in interest on the debt it already owes to residents and foreigners, it further reads.

According to the author, Pakistan cannot meet its external financing needs without incurring more government debt. This is because it does not attract any meaningful FDI (less than $2bn every year) and its private sector is incapable of generating capital inflows from abroad.

Another warning sign is that the IMF’s forecasts of Pakistan’s public debt and key variables that affect it.  The primary deficit, real interest rates, growth and the exchange rate have historically all been wildly overoptimistic, as denoted by the flashing red lights on its realism scoreboard.

As a result, the author has questioned why should this time be any different.

He expressed disappointment that the IMF has ignored its own latest cross-country research, which shows that by undermining growth, fiscal consolidations fail to make debt more sustainable, especially when the global environment is weak and uncertain.

Conversely, in cases similar to Pakistan, fiscal consolidation must be done at a moderated pace inclusive of debt restructuring.

Murtaza Syed, in his concluding remarks, has called for a shift from harsh measures involving spending cuts to a more efficient approach to restructuring the country’s debt.

This would reduce immediate financial pressures and allow more funds to be used for important economic segments for development.

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