The International Monetary Fund (IMF) left Pakistan on Friday, February 10 after it failed to reach an agreement with Pakistan on a billion-dollar loan package aimed at avoiding the country’s potential bankruptcy.
The IMF team landed in Islamabad at the end of January for the final round of negotiations for the $1.1 billion loan package to help Pakistan get out of the serious economic crisis. The IMF was seeking a series of reforms to increase the country's low tax base, end tax exemptions for the export sector, and increase prices for petrol, electricity, and gas. The loan package would also require support from countries such as Saudi Arabia, China, the UAE, and the World Bank. However, after 10 days of negotiation, both sides failed to agree to a deal.
The economic crisis in Pakistan has significantly depleted the country's foreign exchange reserves, leaving it with just enough foreign currency reserves to cover a month's worth of imports. Pakistan imports a wide range of goods and services, many of which are essential to the functioning of the country's economy and society, these include petroleum, machinery, food and agricultural products, pharmaceuticals, and raw materials. The nation is also grappling with sky-high levels of foreign debt, putting further strain on its already fragile economy.
Despite the lack of a financial lifeline, both sides tried to present a positive outcome from the talks. Nathan Porter, the head of the IMF mission, stated that "considerable progress" was made after ten days of negotiations. Pakistan's finance minister said that the country had been given a roadmap for reforms, which he described as "painful but necessary." The IMF has made it clear that it wants to see concrete action and commitments from Pakistan before it agrees to provide further lending.
In January, annual inflation in Pakistan rose to a record high of 27%, the highest it has been since 1975. The depreciating rupee, which has reached a historic low of 275 to the dollar, has compounded the economic concerns in Pakistan. This is particularly concerning as the country is heading into an election year. The lack of foreign currency is one of the most pressing issues facing the country, causing many factories to shut down as they cannot afford to import goods like petroleum, machinery, pharmaceuticals, and raw materials.
The country faces serious economic downfall. Jubilee Textiles in Faisalabad, the industrial hub of Pakistan, is one such example. The factory was forced to close its doors last month and send its 300 workers home as it couldn't obtain dollars to pay for the goods it needed, Manager Fahim told BBC in an interview. This is only one of many businesses that face serious problems due to a lack of foreign currency reserves in the country. According to analysts, the government had been holding the bank's exchange rate artificially high, which contributed to the shortage of dollars in the system. However, the government allowed the rate to drop at the end of last month, which could benefit some businesses, but may also push prices up.
Businesses and industries across Pakistan have been forced to slow or stop work while they wait for the imported goods that are currently stacking up in ports. In late January, a government minister reported that over 8,000 containers containing goods ranging from medicine to food were piled up in Karachi's ports. While some of the containers have started to clear, many are still stuck, causing further delays. The main reason that containers are either delayed or stacked at ports is because local banks are suspending the opening of letters of credit (LCs). This may result in further price increases in the near future.
The country's finance minister outlined a roadmap for reforms, but it remains to be seen whether these measures will be enough to stabilize the economy. The IMF team has left Pakistan on Friday but virtual discussions between Pakistan and the IMF will continue in the coming days, but for now, businesses and industries across the country are facing an uncertain future.
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