Recent loan negotiations with Pakistan have cemented the International Monetary Fund's (IMF) global economic influence. After the tense negotiation process, Shehbaz Sharif’s government agreed to implement electorally inconvenient policy changes to unlock a tranche of the IMF loan necessary to avoid the default on its debts.
Pakistan, a nuclear state with powerful allies and strong motivation to avoid policy conditionality failed to gather enough bargaining power to ease the terms of the agreement. This serves as a cogent rebuttal to the claims that the IMF has lost its relevance in the evolving geopolitical scene. Despite the criticisms of its practices and the rise of alternative lenders such as China, the IMF is still able to stringently set the terms of loan agreements and impose policy reforms.
Moreover, the recent negotiations obliterate the hopes of the developing countries that they could exert meaningful influence over this giant. Strong alliances, the threat of default, and symbolic significance in the IMF portfolio have all proved futile in the attempts to build Islamabad’s bargaining power.
Pakistan found itself in a dire situation with the country’s foreign exchange reserves shrinking to $2.9 billion, amounting to three weeks' worth of imports. In addition to the everlasting issue of its current account deficit, destructive floods and political instability, Pakistan had no choice but to seek financial assistance. The government resorted to negotiations with the IMF to unlock the $1.1 billion tranche of the loan agreed upon in 2019. In exchange for releasing the money, the Fund required Pakistan to raise the general sales tax by a percentage point to 18%, remove fuel and energy subsidies and stop the interference with the exchange rate. These conditions were hard to accept for the government in Islamabad.
The austerity policy will inevitably exacerbate the economic hardship of the Pakistani lower and middle class, possibly leading to public unrest and loss of electoral support. Furthermore, former Pakistan PM Imran Khan, who was removed from office last year with a no-confidence vote, now hopes to benefit from the ongoing crisis by pressuring the government to step down. With the elections coming up later this year, the adoption of severe austerity measures mandated by the IMF constitutes a perilous venture. However, the best alternative to the negotiated agreement was not any better. With reserves running low and a lack of alternative lenders, Pakistan would have to resort to default. As demonstrated by the recent example of Sri Lanka, Shehbaz Sharif knew that while austerity is politically risky, the default is a one-way ticket to deposition.
The only feasible options to improve Islamabad's bargaining position were to either seek alternative financial assistance from one of its allies or strategically delay the negotiation until the IMF sought to avoid the failure of one of its biggest projects. Neither of these attempts was successful. All allies of Pakistan made their financial help conditional upon reaching an agreement with the IMF. Most surprisingly, Beijing, Islamabad’s strategic partner and major infrastructure investor, did not support the state in resorting to its alternative –which is particularly interesting since 30% of Pakistani overall debt is owed to China. Despite that, it chose not to assert its influence at the expense of the South Asian state.
The last resort was to hope that the IMF would ease its demands in the face of impending default. After all, Pakistan is its biggest debtor in Asia and fifth in general. The failure of one of the IMF’s most prominent projects could raise questions about the effectiveness and credibility of the Fund's lending programs. Further, the organization would risk its financial stability. Not only would the donor countries be more hesitant to continue financing its operations but also the IMF would struggle to recover the full amount of its large loans to Islamabad.
All these risks and considerations did not discourage the IMF from firmly standing its ground. Pakistan had no choice but to agree to the IMF recommendations. This negotiation shows that the IMF continues to have the upper hand in shaping global economic policies despite its criticism and the rise of new financial powers.