Also Read: India may oppose $1.3 billion IMF loan to Pakistan
Notably, Pakistan is dependent on external loans after an IMF bailout in 2023 brought it back from the brink of default.
Can Pakistan wage a loan-funded war?
India could oppose a proposed $1.3-billion International Monetary Fund (IMF) loan to Pakistan at the upcoming board meeting of the multilateral institution on May 9, people familiar with the discussions had told ET a week ago.
“There is a view that support to terror by the neighbouring nation be flagged at the board meeting when the loan is taken up,” one of the persons had told ET. The IMF board will on May 9 discuss a new $1.3-billion arrangement for Pakistan under its climate resilience loan programme. It will also conduct a review of the ongoing $7-billion bailout package, including progress with the policy milestones. New Delhi had earlier abstained from voting on the bailout package given to its neighbour to support its wobbly economy. This time, New Delhi could vote against IMF help to Pakistan, citing misuse of the funds and technical grounds, another person said.
Also Read: Forex reserves show a pauperised Pakistan, a prospering India
The IMF and Pakistan had in July 2024 reached a deal for a $7-billion package under the extended fund facility. The programme required Pakistan to put in place sound policies and reforms to strengthen macroeconomic stability, address deep structural challenges, and create conditions for a stronger, more inclusive, and resilient growth. The $7 billion is being disbursed in tranches and the IMF board’s nod is crucial for the release of the next tranche of $1 billion.Just before the IMF Executive Board meets on May 9 to take a call on a new loan along with the first review of the ongoing $7 billion bailout package for Pakistan, India has made a new appointment.
Parameswaran Iyer, Executive Director at the World Bank, has been temporarily entrusted with the responsibility of being India’s nominee director on the board of IMF. Iyer’s nomination was necessitated to fill a vacancy created with the termination of services of K V Subramanian as the executive director at the IMF, six months ahead of his three-year tenure. Iyer’s appointment is said to be aimed at sharpening India’s diplomatic efforts at the IMF.
Pakistani economy risks slipping back to the edge
Pakistan has been trying to prove to its lenders that it is improving its macroeconomic conditions. Pakistan says its $350 billion economy has stabilized under the $7 billion IMF bailout that had helped it stave off a default threat.
Inflation in Pakistan has been declining for several months, hitting low double digits in February, after it soared to around 40% in May 2023. Amid easing of inflation, Pakistan’s central bank on Monday decided to cut the policy rate by 1 per cent, bringing it to 11 per cent.
The central bank has been continuously slashing the policy rate and has so far reduced it by 1,000 basis points (bps) from 22 per cent since June 2024. The low inflation is primarily attributed to lower prices of key food staples such as wheat and its derivatives, onions, potatoes and certain pulses, as well as a cut in electricity and fuel charges.
“Over the past 18 months, Pakistan has made significant progress in restoring macroeconomic stability and rebuilding confidence despite a challenging global environment,” the IMF had said in a statement in March. “While economic growth remains moderate, inflation has declined to its lowest level since 2015, financial conditions have improved, sovereign spreads have narrowed significantly, and external balances are stronger,” the IMF said about Pakistan.
However, the cost of extended border tensions with India, not to talk of a long-drawn conflict, might fritter away the economic gains Pakistan has made since it was pulled back from the brink of bankruptcy in 2023.
Sustained escalation in tensions with India would likely weigh on Pakistan’s growth and hamper the government’s ongoing fiscal consolidation, setting back Pakistan’s progress in achieving macroeconomic stability, according to a report by Moody’s Ratings.
A persistent increase in tensions could also impair Pakistan’s access to external financing and pressure its foreign-exchange reserves, which remain well below what is required to meet its external debt payment needs for the next few years, the global rating agency warned. Pakistan’s foreign-exchange reserves have barely surpassed $15 billion, while India’s reserves exceed $688 billion.
India’s suspension of the Indus Waters Treaty can result in severe reduction in Pakistan’s water supply which will impact agricultural output, boosting inflation which Pakistan has brought back to low double digits from nearly 40% in 2023.
(With inputs from agencies)
