Pakistan's IMF Debt Crisis Worsens Amid Middle East Conflict Risks

During the past three decades, Pakistan has been administered by the military and civilian governments represented by all three major national parties - notably Pakistan Muslim League-N, Pakistan Peoples' Party and Pakistan Tehreek-e-Insaf, the article in the Karachi-based Business Recorder said, noting that all of them have taken IMF loans.

The incumbent government inherited the IMF's extended fund facility (EFF) in April 2022, which was followed by securing two further loans. The article laments that the question of prioritising politics over economics continues to this day, as a result of which the country is in deep economic trouble.

Two items, consisting of around 20 per cent of total budgeted current expenditure, that should come under immediate review are: government employee-related expenses (civilian and non-civilian) and pensions (civilian and non-civilian), the article pointed out.

This is also increasingly a source of public discontent as the poverty rate has risen to an alarming 42.4 per cent as per the World Bank (with a $3.65 per day threshold), with approximately 1.9 million falling into poverty in 2025.

Subsidies, particularly for electricity, are another current expenditure item that has witnessed an annual rise. Employee-related expenses and subsidies account for over Rs 2 trillion of the budget, and if reduced by half, would go some way in providing fiscal space that remains extremely narrow and a source of concern to the Fund staff under the ongoing programme.

The other major outlay under current expenditure is on debt servicing. The Deputy Managing Director of the IMF recently stated that central banks would have to "look at the incoming data and keep a very careful eye on both what we would call second-round effects. Meaning is inflation moving into broadening beyond just energy price inflation, and also our inflation expectations continuing to be well anchored".

A more appropriate policy would be to reduce domestic and external debt through slashing current expenditure items while ensuring that operational costs of both the civilian government and the establishment are fully met. Subsidies for the power sector must be cut, and performance of the sector improved to bring down costs and prices, the article stated.

The situation today, however, in light of the Middle East crisis, continues, and the IMF Communications Director, when asked, gave no definitive answer during her press conference on March 19.

The option that the incumbent government has taken so far reflects the same old policies of yester years: slashing development outlay by 10 per cent (with a direct negative impact on growth), higher subsidies for petrol and products (with a rise in petroleum levy on petrol - a commodity whose price is largely felt by the poor to the low income levels) and setting up a fund from which to extend subsidies likely to raise the budget deficit, a highly inflationary policy, rather than slashing their own current outlay, the article lamented.

- IANS