Extending the Inevitable: Pakistan's Reliance on IMF Bailouts

Despite warnings about Pakistan's debt sustainability, the IMF's latest agreement with the government appears to be a short-term fix, ignoring the underlying structural issues.

Jul 26, 2024

The Facts:

Pakistan has once again secured a staff-level agreement with the International Monetary Fund (IMF) for a record 24th bailout package. However, the conspicuous absence of any mention of debt sustainability in the accompanying IMF press release is both surprising and disappointing. Just a few months ago, the IMF had warned that Pakistan's path to debt sustainability was "narrow" amid "acute," "exceptional" and "uncomfortably high" risks from elevated gross financing needs and scarce external financing.

As Nathan Porter, the IMF's Pakistan mission chief, explained, "The program aims to capitalize on the hard-won macroeconomic stability achieved over the past year by furthering efforts to strengthen public finances, reduce inflation, rebuild external buffers and remove economic distortions to spur private-sector led growth."

Yet, the latest agreement between the IMF and the Pakistani government seems to be an attempt to "extend and pretend," kicking the can down the road. According to the IMF, Pakistan owes the world an average of $19 billion in principal repayments every year for the next five years, which is more than half of its export revenues. It will also need a minimum of $6 billion annually to finance even threadbare current account deficit forecasts, bringing its total external financing needs to at least $25 billion per year between now and 2029. Unfortunately, Pakistan has foreign exchange reserves of less than $9.5 billion.

Pakistan's public debt is already above 77% of GDP, which is considered excessive for an emerging market. The country's gross financing needs (the sum of the budget deficit and debt coming due over the next year) are 24% of GDP, which is second only to Egypt in the emerging world. This heavy debt burden is crippling, with interest payments consuming around 6.5% of its GDP each year for the next five years. This heavy interest burden leaves the government with little resources for critical social spending, such as education and healthcare. In fact, Pakistan spends almost three times more on interest than on education, and almost six times more on interest than on health. Furthermore, 40% of children under the age of five in Pakistan are stunted, and 26 million are out of school. Pakistan invests just 12% of GDP, which is two and a half times less than what is generally considered as necessary for sustained growth.

Further debt accumulation will be dangerous for Pakistan given its already high public debt and gross financing needs, which are among the highest in the emerging world. The IMF's own forecasts of Pakistan's public debt and key macroeconomic variables have historically been overly optimistic, raising doubts about the realism of the assumptions underpinning the current bailout package. The consequences of this "extend and pretend" approach are likely to be devastating, imposing unbearable austerity on an already struggling population and leading to deeper losses for creditors when the inevitable reckoning comes.

As Adeel Malik, associate professor of international development at Oxford University, has criticized, "One program after another fails to achieve its objectives. If the IMF programs were effective, they would have resolved our structural problems in the last two decades. The IMF does not help improve Pakistan's economy; it merely helps manage the books.".

The View:

It is clear that Pakistan's debt burden is unsustainable, and the IMF's decision to ignore the reality of the situation is both shortsighted and irresponsible. The IMF programs have failed to resolve Pakistan's structural economic problems, and the fund merely helps the country manage its books rather than improve its economy. The country's external financing needs cannot be met without incurring more government debt, as it does not attract meaningful foreign direct investment (FDI), and its private sector cannot generate sufficient capital inflows. This debt crisis is a canary in the coal mine for the many other developing countries facing similar challenges, and it is precisely in such cases that debt relief and truth-telling are most needed.

The Fund's reluctance to call a spade a spade and acknowledge the severity of Pakistan's debt crisis is a disservice to the country and its people. The IMF's insistence on pushing through austerity measures and fiscal consolidation, without addressing the underlying structural issues and debt overhang, is a recipe for further economic distress. Instead of kicking the can down the road, the IMF should be advocating for a comprehensive debt restructuring and relief package that would free up resources for much-needed social and development spending. This would not only alleviate the burden on the Pakistani people but also lay the foundation for sustainable economic growth.

TLDR:

Silicon Valley's venture capitalists are increasingly gravitating towards Donald Trump's new running mate, JD Vance, a former tech venture capitalist himself.
Vance's nomination has led some tech entrepreneurs in Silicon Valley who were previously closeted conservatives to openly embrace the MAGA movement.
Prominent venture capitalists like Marc Andreessen, Ben Horowitz, and Doug Leone are making large donations to political action committees supporting Trump's campaign
Silicon Valley's main concerns are around regulation of cryptocurrencies, artificial intelligence, and proposed tax changes that could hurt the venture capital industry.
This shift towards the right in Silicon Valley has been driven by a combination of factors, including resentment over the public backlash against tech, disillusionment with President Joe Biden, and a cultural adjustment within the tech industry towards a more hard-nosed management style.
Vance's own ideological transition from a "never-Trumper" to a MAGA advocate mirrors the financial motivations of some tech investors who have soured on Biden's policies.
The broader corporate America is more wary of Vance, seeing him as highly unpredictable and driven by grievances, in contrast to the more transactional nature of Trump.
Vance's views on issues like immigration, abortion, and diversity initiatives in tech have the potential to fuel a greater unravelling of Silicon Valley's supposedly progressive values.