Will IMF deal end Pakistan's economic misery?

Irfan Ali, a 22-year-old resident of Rawalpindi, has been struggling to make ends meet over the past year.  

Pakistan's grave economic crisis has resulted in massive layoffs during this period and Ali, who was working for a real estate firm, also lost his job.

He's managed to find work at a ride-hailing app, but says earning opportunities from it are limited, as demand for such services is down amid the gloomy economic climate and extremely hot summer weather.

Ali says he's currently earning about 22,000 Pakistani rupees ($78, €71.5) a month, which is not enough to support his eight-member household, including his wife, mother, and five brothers.

"The situation is very grim. The very high food inflation and fuel prices are aggravating the misery of the poor," he told DW.

What's ailing Pakistan's economy?

Pakistan has been in a state of economic turmoil in recent years.

Corruption, mismanagement, the COVID-19 pandemic, a global energy crisis, and natural disasters have all taken a heavy toll on the economy.

The growth of Pakistan's gross domestic product (GDP) — an economy's output in goods and services — has ground to a halt, with expansion projected to be just 0.29% for the fiscal year ending June 30.

Inflation, on the other hand, has been surging, reaching a record 38% in May.

Many Pakistanis have seen a sharp decline in their real wages.

The nation's poor, in particular, are bearing the brunt of the soaring cost of essential items.

Food prices, for instance, have jumped 40% over June 2022, while transport costs have risen 20% in the same period.

While the South Asian country's currency has plunged to record lows against the US dollar this year, foreign exchange reserves have dwindled to just $3.5 billion, roughly enough for merely three weeks of imports.

'It's a critical deal'

To tackle the ballooning foreign debt and bridge the widening balance-of-payments gap, Pakistan has been in talks with the International Monetary Fund (IMF).

Islamabad struck a $3 billion standby deal with the global lender on Friday, which Prime Minister Shahbaz Sharif's government hopes will provide much-needed relief.

It will put Pakistan "on the path of sustainable economic growth," Sharif said.

The agreement is subject to approval by the IMF board in July.

"The deal is very significant and it will help avert a catastrophic balance of payments crisis," Khurram Husain, a Karachi-based financial analyst, told DW. 

Michael Kugelman, a South Asia expert at the Washington-based Woodrow Wilson International Center for Scholars, shares a similar view.

"It's a critical deal, given that Pakistan's economic crisis is too severe to have the luxury of exploring other immediate fixes," he told DW.

"The economy has been on life support, and this IMF aid will restore its vital signs. But of course, given the austerity that the IMF deal entails, it also comes with a political cost."

The IMF agreement is also expected to unlock other bilateral and multilateral financing for the crisis-stricken country.

Key lenders like China, Saudi Arabia, and the United Arab Emirates (UAE), for instance, have already pledged or rolled over billions of dollars in loans.

"This program will help secure funds from other sources, thereby stabilizing the currency and the economy in the short term," Mohammed Sohail, economist and head of the Pakistani brokerage house Topline Securities, told DW.

Will it be different this time round?

However, to strike the IMF deal, Pakistan has had to agree to some painful measures, including scrapping popular subsidies on gas and electricity, which had cushioned the cost-of-living crisis.

Ali fears that these moves will hurt poor people further.

"The politicians have no relief plan for the poor, and they will increase the fuel prices sharply," he said.

Kugelman said that the agreement will necessitate "some economic shock treatment that will make life more, not less, difficult for the people in the short term."

"But that's the calculus behind these IMF programs: Short-term austerity that can be politically damaging, with a more long-term result of economic stability that pays off politically," he underlined.

"This cycle often hasn't played out entirely for Pakistan though, because its governments have often reneged on their commitments after the deals are signed, and prevented IMF programs from being carried out in their entirety."

Experts say the agreement should be viewed as a stopgap measure that gives Pakistan time and some resources needed to pull its economy back from the verge of default.

A sustainable recovery would require a longer-term IMF deal and major reforms, Kugelman said.

"But these longer-term considerations will likely be taken up by Pakistan's next government, after this year's elections."

Edited by: Srinivas Mazumdaru