IMF Twists Pakistan Slowly in the Wind Over Loan

US in the background plays politics over Russian oil and other issues

By: Salman Rafi Sheikh

Pakistan: under water in more ways than one

In an unsubtle behind-the-scenes effort to wean Pakistan away from China, the United States appears to be behind an International Monetary Fund delay in unlocking a desperately needed US$6 billion Extended Fund Facility that Islamabad needs to avoid a sovereign default. Even though Pakistan has jumped through most of the IMF’s hoops – removing subsidies on fuel and electricity prices, raising their overall prices and seeking sovereign guarantees, etc – the Fund is yet to decide whether it will unlock the facility.

For Pakistan’s coalition government, the prolonged negotiations with the IMF are certainly frustrating since the unavailability and shortage of foreign exchange, is directly contributing to the rupee’s fall and subsequent inflation and generating political flak from the ousted opposition headed by former Prime Minister Imran Khan. There is no denying that part of the reason Pakistan – especially, the new government that was established in April 2022 after Khan was voted out of power – failed to implement the IMF-suggested changes within a specified period i.e., before the next review, has to do with domestic politics and economic factors.

For one thing, the level of devastation caused by the 2022 floods that affected millions of people and wiped out billions from the economy made it extremely hard for the new government to transfer the burden of economic reforms to the masses. Second, immediately after Khan was voted out, his party defeated the ruling PML-N in crucial by-elections in Punjab, the country’s largest economic state – a defeat commonly attributed to the new coalition’s unpopular economic measures. That defeat politically unsettled the coalition government, in particular, the PML-N, which is based in Punjab, and forced it to slow the pace of reforms. It also forced the PML-N to replace its finance minister Miftah Ismail, who was keen to implement the IMF plan, with Ishaq Dar who stopped the implementation to bring what some experts call an artificial economic stability.

With the floods having wiped out billions, this should have pushed the IMF to relax its conditions to help Pakistan cope. The contrary happened. There are three principal reasons for this, some tied to domestic politics.

First, a key reason is the ongoing political conflict in Pakistan and the possibility that Khan could win the elections due to be held in October. The IMF is uncomfortable with the prospects of Khan’s return insofar as the Fund believes that it was his previous government that (deliberately) violated the agreement his government made in 2019. This violation happened just before Khan was voted out, as the Khan government decided, against the IMF’s advice, to subsidize fuel prices and drive another hole in its finances.

For the Fund, therefore, if it revives the loan facility and renews the agreement with the present government, there is no guarantee that the next Khan government would honor the unpopular commitments made by the present coalition.

Second, part of the IMF’s continuing reluctance is the roughly US$30 billion debt Pakistan owes to China. As officials told Asia Sentinel on the condition of anonymity, the IMF has been urging Pakistan to push China to restructure its debt. The US$2 billion China recently rolled over hasn’t satisfied the IMF. According to officials familiar with the process, Islamabad is under pressure vis-à-vis China primarily because of the ongoing ‘Cold War 2.0’ between China and the US. With the US the biggest IMF stakeholder, it appears to be using the IMF to reduce Chinese influence in Pakistan as part of its overall strategy to reduce China’s global economic – and geopolitical – footprint.

In fact, in September 2022, the US officially ‘advised’ Pakistan to seek debt relief from China. Echoing the IMF position, the US Secretary of State Antony Blinken urged his Pakistani counterpart, Bilawal Bhutto Zardari, “to engage China on some of the important issues of debt relief and restructure so that Pakistan can more quickly recover from the floods.” In the same month, the IMF warned Pakistan that investments in the second phase of the massive,50123 debt-ridden China-Pakistan Economic Corridor (CPEC), a signature Belt & Road Initiative project, could raise growth prospects but the project loans could “pose a risk to debt sustainability” – hence, the need to restructure debt repayments.

Pakistan’s inability to push China, however, has crippled the IMF talks. Islamabad, as I have learnt, is unable – and unwilling – to antagonize China, which remains a key source of military equipment in the absence of any significant military-to-military cooperation between Pakistan and the US.

Thirdly, Pakistan’s search for better ties with Russia has also become yet another bone of contention between Islamabad and Washington. Ever since February 2022, when Imran Khan visited Russia on the eve of the beginning of Russian military operations in Ukraine, Pakistan has been seeking to buy Russian oil to reduce its import bills. Russia expressed its willingness and sent a Russian delegation to Pakistan in January to explore the possibility of bilateral energy cooperation.

Whereas Washington publicly has a ‘no-objection to buying Russian oil’ policy, there is little denying that Islamabad’s purchase decision directly undercuts Washington’s policy to force-reduce the buyers of Russian oil in order to cripple its economy, bring oil prices down, and consequently dent the Russian ability to fund its military conflict with Ukraine (and its western allies).

More importantly, the development of energy ties between Pakistan and Russia would push Pakistan further in the ‘Eastern Bloc’ away from the US, making it a lot harder for Islamabad to convince the IMF to make its conditions less stringent and/or release the funds.

As Washington and the IMF understand, Khan’s return to power would only accelerate Pakistan’s energy ties with Russia, as his government will be keen to project its ability to manage the economic crisis better than the present coalition government. It is unlikely that this government will be interested in protracted negotiations with the IMF when it can increase its foreign exchange reserves via cheap Russian oil.