Since last year, Pakistan has been witnessing economic turmoil and desperately seeking a bailout package from the International Monetary Fund (IMF). On June 23, the IMF announced a Stand-By Arrangement, a short-term bailout package of $3 billion for nine months for Pakistan. China also provided a rollover of $2 billion in March and another $1 billion in June this year, deposited in Pakistan’s Central Bank to help with the IMF bailout. Last year, along with China’s offer of $9 billion bailout package, Saudi Arabia, another long-time ally of Pakistan, offered $4 billion to Pakistan.

The United Arab Emirates also offered $3 billion. Similarly, Sri Lanka, which saw an economic meltdown last year, secured an IMF bailout after India, Japan and Paris Club announced their decision to restructure debt as Beijing watched. Meanwhile, Bangladesh received IMF financial support to ride over its falling forex reserve.

However, the decision to approach financial aid from the IMF drew severe criticism in Pakistan, Sri Lanka and Bangladesh. In Pakistan, the Imran Khan-led government had negotiated the IMF bailout package of $6.5 billion loan programme in 2019 to be delivered over three years but decided not to implement the reforms asked by the Fund as it was hurting his political project of building “Islamic welfare state”—a poll promise he had made. As a result, after the first tranche of $991.4 million, the remaining tranches were frozen. Similarly, many blame Sri Lankan government for delaying its approach for the IMF bailout, which resulted in bankruptcy. Some also attribute this decision to Chinese pressure not to approach the IMF. The Bangladesh government’s decision to seek IMF loans drew severe criticism and opposition, highlighting how the economy is failing under the current regime.

The question is why IMF’s extended credit facility draws so much flak while the loans from bilateral partners with high interest rates are never intensely debated within the country. Yet, many of the bilateral financiers always look to the IMF’s decisions before extending the financial bailout packages. IMF lending always boosts investors’ confidence, as strong reform preconditions the Fund imposes help a country’s economic recovery. There is a belief that IMF’s structural adjustment programmes do not consider local realities. Its emphasis on a free market economy impacts the poor, who rely on government subsidies to minimse economic hardship. With rising inflation and insistence on removing subsidies, the IMF programmes remain unpopular for the populist governments worldwide. Despite this, the countries approach the IMF as few options remain.

Why subsidy?

As the countries of the region transited to electoral democracy, governments regularly announced subsidies to address the rising prices and win over the electorate for a favourable mandate in the elections. However, these subsidies are not sustainable, as the countries have low income tax collection along with other tax revenues that add to the bourgeoning budget deficit. This fluctuates agriculture production, where farmers often depend on the government to fix the minimum price of agriculture products to ensure a return for the farmers.

However, most countries pursue a policy that is intended not to be harsh with the poor and at the same time, incentivise agriculture by providing subsidies in fertiliser purchases as well as in power consumption. Agriculture remains the backbone of South Asian countries but is subjected to natural vagaries that often leave farmers incurring heavy debt. IMF programmes come with several conditionalities that are considered harsh on the poor as the Fund insists on removing subsidies and reducing the budget deficit and other “non-essential” expenditures. This also includes oversized cabinets that governments boast. Most often, the governments criticise IMF conditions, yet they see the IMF support as the only means to gain international creditors’ confidence.

Pakistan and the IMF

Pakistan’s Finance Minister Ishaq Dar, who publicly announced that the IMF advice on Pakistan’s budget is unacceptable, had to swallow his words after the government agreed to make amends to its budget to incorporate suggestions given by the IMF to make it eligible for the IMF Stand-By Arrangement. Pakistan must now remove restrictions placed on imports, reform its power sector so that the cost of electricity production is recovered from the consumer, remove tax exemptions that enable the government to generate revenue, improve its foreign currency reserve, remove non-performing loans handed out by its banks, reduce the budget deficit and allow market determination of the rate of exchange for foreign currencies. The country is expected to pay $4 billion by the end of this year.

In 2022, Pakistan failed to implement 16 of the 28 conditions resulting in the IMF holding back $1.1 billion tranche and placing another eight tougher conditions as the forex reserve went down. Despite the fact that the country has approached the IMF 23 times in the past, Finance Minister Dar promises that this will be the last time the country approaches the Fund. As a result, the government has withdrawn subsidies from the agriculture sector and other sectors exempted from value-added tax (VAT). Due to the unprecedented flood, Pakistan announced subsidies to farmers in October last year.

Sri Lanka and the IMF

On March 20, 2023, the IMF Executive Board approved a 48-month Extended Fund Facility (EFF) of about $3 billion for four years to support Sri Lanka’s economic policies and reforms. Sri Lanka is also the first country to undergo IMF’s Governance Diagnostic Exercise. As Sri Lanka declared itself bankrupt last year, IMF’s EFF has been crucial for its economic recovery and to gain investors’ confidence. Sri Lanka has a long way to go as far as its economic recovery is concerned. It faces debt distress and has been struggling to restructure its debt, which will give the country room for recovery and work on debt sustainability.

Sri Lanka’s creditors, including India, Japan and Paris Club, have formed a committee to look into debt restructuring in which China is an observer. It is expected that by September this year, they need to develop restructuring agreements to help the IMF in their first review meeting on debt sustainability. It is important to note that to gain the IMF loan, Sri Lanka needs all of its creditors to agree to a debt restructuring that will provide the country with an economic breather.

Bangladesh and the IMF

Bangladesh also approached the IMF for a $4.7 billion loan approved in January this year. Unlike Pakistan and Sri Lanka, Bangladesh is one of the fastest-growing economies. However, economic recovery made post-pandemic suffered from the rising energy price after the Russia-Ukraine war. Its export earning has fallen and its forex reserve has shrunk. Dollars prices have risen as the government allowed market rates to prevail, and the government has restricted foreign travel and certain import restrictions. The IMF has been emphasising boosting the foreign currency reserve.

Though Prime Minister Sheikh Hasina is optimistic that Bangladesh will soon pay back IMF loan, the country’s economy does not look bright. Like other countries that have knocked on IMF door, Bangladesh also needs to increase its tax net and end subsidies as part of reform initiated by the IMF.

All three countries are in election season. The IMF conditionalities will put serious pressure on the populist measure the governments adopt in an election year. Yet, a hard economic decision has to be taken. An economy in shamble would mean the end of political populism and nationalism that often results in lopsided policies.