By Saeed Shah/Wall Street Journal
Islamabad (July 15): For much of this year, Miftah Ismail, a Wharton Ph.D., has had one critical task—trying to avoid a Sri Lanka-type economic meltdown in Pakistan. The country isn’t out of danger yet, but this week Mr. Ismail secured a crucial bailout from the International Monetary Fund.
Mr. Ismail, whose family business is one of the country’s leading candy-makers, became finance minister when a new government came to power in April. The IMF said Wednesday that it would provide $4 billion over the next year, saying that Pakistan was at “a challenging economic juncture.”
Pakistan was at risk of default in recent weeks, Mr. Ismail said, as supply shocks from the Russia-Ukraine war helped send the price of fuel and food imports soaring. That shredded the finances of Pakistan and other vulnerable developing nations, such as Egypt and Tunisia. For Sri Lanka, already in a precarious position, the jolt from Ukraine led to a financial collapse and months of protests that ousted the government.
Mr. Ismail needed to satisfy the IMF that this time the country would stick to its word, after the lender suspended its program earlier this year when the previous government in February brought in a fuel subsidy and tax amnesty without the IMF’s agreement. Also complicating the negotiations for Pakistan was the need to protect the interests of key ally China.
Like Sri Lanka, which defaulted on its foreign debt in April, Pakistan too went on a borrowing binge from China in recent years. Across the world, the IMF has been wary that its loans aren’t used to pay off the Chinese, as Beijing became in recent years the world’s biggest lender to poor countries.
The IMF and the new government negotiated for weeks. The lender then waited for Pakistan to implement agreed overhauls before agreeing to provide the lifeline, which still needs approval from the IMF’s board.
“The IMF program puts us on the path to fiscal and monetary stability,” Mr. Ismail said in an interview. “We will stick to the program steadfastly to ensure we can ride out the very challenging external environment.”
Pakistan’s central bank had a little over $10 billion in foreign exchange reserves in April when the government took over. But debt repayments due this year alone are $21 billion, Mr. Ismail said. The painful remedy that Mr. Ismail pressed on the shaky and reluctant new coalition government was hiking gasoline prices and taxes. He told jittery colleagues that there was no other choice.
It took nail-biting weeks for coalition partners and Prime Minister Shehbaz Sharif to agree to raise the price of gasoline, in the face of a fierce challenge from former Prime Minister Imran Khan, whose administration was ousted through a no-confidence vote in parliament in April. Mr. Khan marched on Islamabad in May, making the price increases under the new government one of his campaigning slogans.
The key measure was taking away a $600 million-a-month subsidy of gasoline, which then almost doubled the price for consumers. That subsidy was worth nearly as much as the defense budget for a nuclear-armed nation with the world’s sixth biggest army. Mr. Ismail said that Sri Lanka didn’t take similarly painful decisions when the crisis there was building.
“Nobody likes to put up prices,” said Mr. Ismail, who worked at the IMF in the early 1990s after earning his doctorate from the University of Pennsylvania’s Wharton School. “We’ve been willing to sacrifice our political capital to get this deal done.”
The political cost for the Pakistani government could become clearer Sunday when a series of local elections will take place to fill vacant seats in the politically crucial province of Punjab, when Mr. Khan will try to prove he remains popular.
“Government and IMF have jointly prepared a plan to impose more inflation on Pakistan,” Hammad Azhar, a former finance minister in Mr. Khan’s ousted administration, said on Twitter. “There is no relief for the population.”
The annual rate of inflation in Pakistan hit 21% in June, driven by the soaring cost of transport and food, official figures show. To cushion the inflation blow somewhat, the government provided $10 to 8.6 million of the poorest families.
Pakistan had an advantage over Sri Lanka as a smaller proportion of its debt is held by international bondholders, a trickier group to negotiate with than loans from countries or multilateral agencies, experts say.
Mohammad Sohail, chief executive of Topline Securities, a brokerage in Pakistan, said that the country’s total external financing requirement for this fiscal year, which begins in July, would be $30 billion to $35 billion, which meant that it would need to borrow from international commercial banks and tap the bond markets.
“The gap is huge,” said Mr. Sohail. “It will be very, very challenging to fill.”
China will likely be one source of money. Beijing has already lent Pakistan billions of dollars, including $2.3 billion in June to bolster its foreign currency reserves.
China has built more than $25 billion of infrastructure in Pakistan over the last seven years under its flagship Belt and Road Initiative to use its construction might to spread its influence around the world. The largest part of that money went on building more than a dozen power plants, to tackle Pakistan’s shortage of electricity.
The previous government renegotiated the price of supplying electricity with non-Chinese power producers, despite having previously guaranteed those prices in contracts with these companies. However, the same treatment wasn’t applied to the Chinese companies, which have similar contracts guaranteed by Islamabad.
That different treatment of the two categories of investors did figure in the IMF talks, and Pakistan refused to renegotiate the Chinese contracts, according to Pakistani officials.
Mr. Ismail declined to comment on the issue, but said that “We are not going to renege on any sovereign guarantees.”
The IMF didn’t respond to a request for comment. In June, the lender denied media reports that it was asking Pakistan to renegotiate the Chinese deals, but it had said then that it wanted a power sector strategy “which shares the burden of restoring viability across all stakeholders.”
The IMF deal is just the first step to restoring Pakistan’s finances. Mr. Ismail said that the agreement opens the door to loans from other multilateral agencies like the World Bank, and the possibility of bilateral and commercial funds.
But some warn Pakistan needs more far-reaching measures than those taken yet.
Salman Ahmed, global head of macro at Fidelity International, a money manager based in Bermuda, said that Pakistan had been going on the equivalent of a crash diet but then reverting to bad habits with successive IMF programs. This is the 22nd such bailout.
“Where is structural long-term reform?” said Mr. Ahmed. “What matters is having policies that create underlying resilience in the economic system, not how you firefight the immediate shock.”
–Waqar Gillani contributed to this article.
Write to Saeed Shah at [email protected]