Pakistan: Return to the IMF with a New Begging Bowl

The International Monetary Fund (IMF) announced today that it had reached a provisional agreement with Pakistan’s newly elected government for a three-year $5.3 billion loan at a likely interest rate of three percent.

This agreement, which will likely be approved by the IMF’s board at its meeting in September, reflects the precariousness of Pakistan’s economic situation as the country attempts to stabilize its foreign exchange reserves which currently amount to just over $6 billion.

This relatively quick agreement, Sharif’s government came into office in early June, sets aside the IMF’s rocky history with Pakistan – the most recent government and Sharif’s previous administration both failed to fulfill the Fund’s conditions.

In addition, Islamabad continues to pay – or attempt to pay – back the loans it owns the IMF.

In fact, if the IMF is truly serious about supporting the Pakistani government, it could combine these new loans with a deferral of existing payments. Indeed, it will be interesting what form these loans take and what conditions accompany them.

By the way, I expected the Sharif government to reach out to Saudi Arabia for short-term assistance before going to the IMF. Indeed, it may still do so. However, I expect that one of Riyadh’s conditions will be the removal of Asif Ali Zardari, Pakistan’s current president and a Shia. Once that happens, Saudi funds should flow fast and often.

The true impact of the IMF loan lies not in its size – $5 billion over three years is a pretty insignificant amount – but in its impact on other donors as it gives them the impetus to also support Islamabad.

As noted above, I am most curious about the IMF’s conditions, which will be painful and will be implemented by Islamabad as it blames the Fund for the subsequent hardship.

The other question is about whom else, other than the Saudis, Islamabad is reaching out for economic aid? Have the Asian Development Bank and/or the World Bank promised anything and if so, what are the amounts, conditions and delivery timelines?

Finally, what will this development mean for US funds? US aid to Pakistan is projected to decrease to $1.2 billion from $2.6 billion in 2012 and $4.5 billion in 2010. Despite this decrease, the US remains the largest and most generous contributor to Pakistan and could use the IMF approval to direct more funds to the new Pakistani government, especially if ti continues to allow the use of drones in its territory.

Regardless of all these funds, the fact remains that they won’t solve Pakistan’s long-term problems unless the country develops functioning government institutions and fixes an almost entirely decrepit infrastructure. The former, which is fundamental to a long-term solution, can only come from an honest government and nothing can ever bring forth that miracle.

Therefore, Pakistan continues to, and will, remain a black hole for foreign aid and a stop on the tour of the world’s most corrupt and dysfunctional governments.