Too Strategic to Fail? The IMF & Pakistan (Again)

With its forex reserves down to a trifling $6.4 billion, Pakistan is definitely in trouble. You know the drill: the United States will not let Pakistan descend into chaos--make that civil disorder even worse than its regular state of perma-anarchy--because it's a nuclear-armed state with a constant Taliban menace. Surely Pakistani elites have noticed this paradox: the key to securing their continued stay in power is to keep things disorderly enough to maintain foreign interest.

This backdrop is probably why we (surprise!) have yet another news article touting imminent Pakistani collapse on hand. I am fascinated how this nation with next-to-no reserves has seemingly staved the inevitable for so long in the form of another IMF package. But before we get to that, let's recount the Egypt-like repeat borrowing habits of this nation:

Since 1988, Pakistan has signed onto eight IMF programs that demanded structural changes in the economy. But it has never managed to resolve its chronic problems...If Pakistan does have to turn to the IMF, it will bring its own set of challenges.

For one, the country has a patchy track record in upholding promised reforms that secured past IMF loans, including an $11 billion program granted amid the last foreign reserves crisis in 2008. The former government abandoned that program in 2011 because it refused to carry out the strict financial reforms required by the IMF. But it still owes the lending agency nearly $5 billion from that old loan.

However, it is generally known that IMF lending is not really conditioned on meeting conditionalities or implementing structural reforms. How important the borrower is to the United States geopolitically matters, and supposedly Pakistan is as strategically important as they come in South Asia. The question to me, then, is not whether Pakistan changes its ways (not likely), but how much the Yanks raise a stink about non-compliance with conditionalities that will, at most, merely result in an Egypt-like delay in disbursing emergency funding:

The new government [of once-and-future PM Nawaz Sharif] will have to convince the IMF with quick actions that this time around will be different. The IMF will want to see far-reaching reforms fast-tracked to reduce the chance of another reversal part way through a multi-year program. And the lending agency is expected to demand vast improvements in a woeful tax system that collects very little money. Taxes currently bring in only about 10 percent of gross domestic product, one of the lowest effective rates in the world. 

The IMF is also likely to press for major changes in the energy sector such as raising prices and phasing out costly subsidies that disproportionately benefit the wealthy, who use far more energy than the poor. The government spends about $1 billion in foreign currency each month to import oil to run its power plants — a costly way to generate electricity and another drain on foreign reserves. Building new hydroelectric plans or converting to less expensive natural gas production would be very expensive and take years. The IMF is also expected to demand some kind of plan to curb losses from state-owned enterprises that amount to billions of dollars a year.

Fat chance, I say. What I predict is the same old, same old: The IMF will b*tch for a while--the duration varies--about Pakistan's intransigence about structural reform when the country inevitably approaches it on its last legs. Ultimately, though, they will lend Pakistan. While making half-hearted gestures to implementing conditionalities, meanwhile, the country will back down amid the usual protests and riots. Thus, unpaid debts to the IMF will pile up as Pakistan tries to make its way out of its untenable situation alone once more. For a while it will resume its messed-up state until foreign exchange dries up again, necessitating another IMF visit.

Repeat over and over again. That is modern-day Pakistan.