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Pakistan in the grip of economic crisis and the IMF

Shehzad Arshad

Pakistan is in the grip of the worst economic crisis in its history. The real danger of default is haunting the country, despite negotiations with the IMF and implementation of many of their conditions.

Inflation has rocketed, making life more difficult than ever for the already poor people. Pakistan’s Consumer Price Index (CPI) jumped to 31.5%, the highest annual rate in 50 years – and even that is far from reflecting the real increase in consumer prices for the mass of the people.

In this situation, the only way out that the ruling class and all its warring factions can see is another deal with the IMF. But even the initial, “staff level” agreement has not yet been reached, although its finalisation has been announced repeatedly since the first week of February, when an IMF team visited Pakistan.

Indeed, the government has already accepted a series of IMF conditions. For example, it accepted the demand to permanently impose a debt surcharge of Rs 3.82 per unit to collect Rs 284 billion more from electricity consumers. More generally, the press reports that the government has agreed to increasing taxes, higher energy prices and raising interest rates to the highest level in 25 years.

Still the deal has not been signed, not least because it is not only the IMF but also other states that have to provide the loans needed. Whilst the IMF claims that the country’s overall financial gap amounts to $7 billion, the Finance Ministry, claims that the gap will be less than $5 billion and will be covered by securing new commercial loans from China and Gulf countries. The IMF is already in touch with these countries about new loans and rollover plans for Pakistan and is now requiring written assurances on this.

It does not only demand that the government sign up to the conditions to be met, but also “proof” of its preparedness to implement them. One test for this is to accept the IMF assessment of the financial gap itself. Moreover, since the IMF is aware of the internal divisions of the ruling class and the power struggle between the ruling coalition and the oppositional PTI of Imran Khan, it demands assurances of implementation not only from the government but also from the main opposition party. The government fears that a public agreement between the PTI leader and the IMF may further increase the opposition party’s political standing.

Finance minister Ishaq Dar’s economics and the dollar

What this demonstrates is that the real reason for the continued delays has nothing to do with the conditions to be imposed on the workers, peasants and poor of Pakistan, but is all about the power struggle inside the ruling class and between the IMF and the government.

In this situation, the financial and economic crisis will drag on, indeed it will worsen. Pakistan’s foreign exchange reserves, thanks to another loan from China, increased by $487 million, clocking in at $4.3 billion as of March 3. This is the fourth successive increase in central bank-held reserves on a weekly basis, but is still below the critical level that could cover a month of imports. Although the government has agreed to buy more essential commodities in order to cover shortages, this “pledge” will not be fulfilled as long as such conditions prevail.

Indeed, for months, we have faced the opposite, a massive decline in imports, or even their complete cessation, of essential goods. At present, there are thousands of containers at Karachi port which are not being cleared. As a result, there is a shortage of medicines, surgical equipment and hospital food supplies. What medical services remain are becoming even more expensive and are unaffordable for ordinary working class people.

When Ishaq Dar was put in charge of the finance ministry, he claimed that he would stabilise the rupee’s exchange rate, bringing it down to 200 rupees to the dollar, or even less. He claimed that he would not compromise on “national sovereignty” or bow to the IMF’s demands. Until the end of 2022 he did keep the exchange rate under control through government intervention but that all changed when the IMF’s demands were made public. The rupee rapidly fell to 275 to the dollar and, by March 2 had reached 290. Now, the people are paying the price and it is clear that a semi-colony has to bow down to the masters of capital. Official dollar reserves have also been hit by Pakistani workers abroad sending home remittances by “unofficial” channels to get a slightly better exchange rate.


Pakistan is not only facing a fiscal crisis. It is also in a deep recession. Large-scale manufacturing output has fallen sharply. The latest national data from Quantum Index of Manufacturing in November 2022 present a clear picture. In the five months from July to November 2022 there was a decrease of 3.5 % in manufacturing and in November one of 5.5 %. The major industries of textiles, petroleum products, chemicals, fertilisers, pharmaceuticals, cement, iron and steel products contracted, some by as much as 25%.

A major reason for the decline in many of these industries is the shortage of imported raw materials. Imports require a Letter of Credit but the creditworthiness of importers or the assurances of payment by banks have been put in question on a large scale. This has led to a blockage of imports and, following from this, a 20% reduction in consumption and 5% reduction in power generation. Deposits in the banking sector are witnessing a decline of more than 8 percent. Declining production of cement, iron and steel industries clearly illustrates the stagnation in construction activities. Overall, in the first six months of 2023 GDP is likely to shrink between 4 and 5 percent. This decline is a major disaster.

The interest rate was increased from 11% at the start of the IMF programme in 2019 to 17% in November 2022 causing a slowdown in the economy. On March 2, it was increased once again under the pressure of the IMF and now it is 20 percent. This further 3% increase meant a loss to the government of about 600 billion, which has to be compensated by an increase in sales tax. Again, this has a direct impact on the working and poor people.

Bank lending to the private sector has grown only marginally, by 4 percent. Imports of machinery fell by 45 percent, including a 44 percent decline in textile machinery. This is expected to further reduce textile exports, which are already at a lower level than in previous years. The level of federal development expenditure in the first quarter of 2022-23 has been reduced by about 48 percent, in line with IMF demands. But further reductions are scheduled.

The highest inflation in history

The aftermath of the 2022 floods, the continued rise in commodity prices since Russia’s invasion of Ukraine, the devaluation of the rupee and the adverse effects of import restrictions have together led to stagflation. Inflation rates, especially food prices, have reached record highs and GDP has been negative in the first six months of this fiscal year. The floods have had the worst impact on agricultural sector output. The biggest decrease is in the cotton crop, down by 40 percent and rice production, more than 15 percent. Other crops, especially vegetables, are also in short supply. The quadruple increase in the price of onions is proof of this. Overall yield loss in the Kharif season, that is, the monsoon season, is likely to be around 10 %.

Consumer prices of onions, chicken, eggs, rice, cigarettes and fuel rose sharply recently, with inflation in this sector exceeding 40 percent for the first time in five months, according to official data. Short-term inflation, measured by the Sensitive Price Index (SPI), rose to 41.54 percent on a year-on-year basis for the week ended February 23, up from 38.42 percent in the previous week.

A deficit economy

The overall external balance of payments position has a deficit of $4.3 billion from July to December 2022. This is despite a sharp decline in the size of the current account deficit to $3.7 billion from $9.1 billion in the same period in 2021-22. The improvement in the current account deficit position has been offset by a sharp deterioration in the financial account. It has gone into a deficit of $1.2 billion compared to a large surplus of $10.1 billion in July-December 2021. The fiscal account has turned negative for the first time in many years. This is mainly due to a big drop in receipts from taxes on imports, 6% in the first quarter and about 30% in the second quarter. The latter is clearly due to the administrative control exercised by the State Bank over import LCs.

A stable exchange rate was maintained after October by government intervention, which increased demand for imports while the State Bank suppressed this demand by controlling LCs. The goal was to control inflation, but supply cuts fuelled inflation by curbing 4.5 billion imports. The State Bank also restricted payments for imported services such as information technology, airlines and banking. The return of profits of (multinational corporations) operating in Pakistan has also decreased.

The ambitious target is to reduce the budget deficit from 7.9 percent of GDP in 2021-22 to just 4.9 percent of GDP during the current fiscal year. But the overall budget deficit has widened to 2.4 percent of GDP in the first six months of 2022-23. Given that the payments in the second half will be much higher than in the first, this makes the target of 4.9% impossible to meet.

There are many reasons for the deterioration of public finances. First, there is additional expenditure on post-flood relief and rehabilitation of over Rs 500 billion. Second, the growth rate in FBR (Federal Board of Revenues) is 13 percent, which is lower than the target rate of 22 percent, mainly due to the decline in the import tax base and negative growth in the large-scale manufacturing sector.

Thirdly, the State Bank has increased the policy rate thereby increasing the domestic borrowing cost of the federal government. There is a possibility that the interest payment on the loan could be as high as 1 trillion rupees, on the orders of the IMF, the policy rate has been increased to 20 percent, meaning that the payment to the banks will increase further. To cover this cost, the size of the federal PSDP would have to be cut significantly. A final risk factor is that the provincial governments could miss the targeted cash surplus of Rs 750 billion by a large margin. Overall, given current trends, the overall budget deficit is likely to be close to 6.5 percent of GDP in the financial year 2022-23.

Increase in unemployment and poverty

Due to the recession in the economy, unemployment is continually increasing. Already, hundreds of thousands of workers are unemployed. At least 2 million more will join them in the remaining months of this financial year. Due to inflation and unemployment, an additional 20 million people will go below the poverty line in this financial year, bringing the total number to more than 80 million. It will also become difficult to meet the basic food needs of half of the population. This situation can become the basis of a major social upheaval and the fear of this is evident in the ruling class.

Debt trap

The ruling class and its intellectuals are admitting that, despite all the measures taken, the economic crisis will not end, and they will have to take another programme from the IMF.

The country needs a substantial sum of $75 billion to service external debt and interest payments over the next three fiscal years. The volume of internal debt is also increasing, an example being the circular debt of the electricity sector, which is up to 2.3 trillion rupees in spite of all the steep increases in the per unit price of electricity. The situation now is that the government cannot pay the loan instalments and interest every year by itself and for this new loans have to be taken. That is, one has to take a new loan to repay the old loans.

Comparing the loans and grants that came in and the money that went out in the last two decades makes it clear that the money that went out was more than the money that came in. This means that Pakistan is stuck in a debt trap. International moneylenders make money from Pakistan by giving loans. This means that debt has become a mechanism for plundering Pakistan’s resources. Due to Pakistan’s position within global capitalism, redemption is not possible. This situation has increased the risk of default to which the government responds by implementing a programme of brutal cuts.

The IMF solution

All previous IMF bailout packages and their neoliberal solutions have failed to bring any long-term or lasting improvement to the economy. The current bailout package will not be different with further mass privatisation, rising unemployment and rising poverty and inflation. The IMF insists that although its policies have an immediate impact on economic growth, they will lead to improvements as capitalists regain confidence in the economy.

What to do?

Economic conditions have worsened and there is increasing tension within the ruling class. This is clearly expressed in the divisions between state institutions and within them. Every layer of the ruling class is striving for its own interest. Inflation has increased enormously and the society is suffering from disintegration. Increasingly, forcing through the interests of the ruling class means greater brutality to suppress the voice of protest in every way.

In these circumstances, the workers, rural and urban poor, peasants and the oppressed sections of the society need to unite to fight against the tyrannical state and its economy. There is a real danger that the impact of the economic crisis on different sectors and regions will be used to increase divisions, divert protests and prevent joint struggle against the real common enemies. There are protests against inflation, wage hikes and privatisation, but there is a need for these protests to be focused on offering a working class alternative to the IMF. In the present era, only the unity of the working class can defeat the IMF programme and remove Shahbaz Sharif’s government.


– A minimum wage, sufficient for a better life for workers. Workers’ wages should be linked to inflation in the prices of essential goods. For every one percent rise in the inflation rate, wages should rise by one percent.

– Instead of privatisation, government institutions should be under the democratic control of the working class. All the institutions closed after privatisation should be re-nationalised under workers’ control. Institutions which have been handed over to the private sector should be brought under the democratic control of the working class and thus all forms of privatisation should be abolished.

– Instead of reducing jobs, working hours should be reduced to prevent unemployment.

– Increase education and health budget by imposing a wealth tax on capitalists, big landlords, multinational companies and other rich sections of the society. After that, new health centres and educational institutions should be built.

– An end to all privileges and tax breaks for the big land owners and the capitalist class.

– Massive subsidy should be introduced in agriculture. Moreover, the lands should be taken away from the big landowners and handed over to farmers and rural labourers.

– The budget for development projects should be increased massively so that social amenities and housing can be built for the working class as well as the rural and urban poor.

– The power generation companies should be taken over by the state and brought under the democratic control of the working class.

– Rejection of the IMF programme, including the refusal to pay the debts of the international economic institutions, is a precondition for the planned and balanced development of the economy, but a government committed to capitalism can never do this. We need a government based on workers’ own organisations to deal with the current disastrous situation and defend the interests of the vast majority of the population.

Support for such a strategy will not be spontaneous, it has to be won by a determined campaign. Those who see the need for a revolutionary strategy, whether in left parties or trade unions, need to organise themselves to fight for it in all working class organisations, as well as amongst the oppressed layers of society, women, youth and the oppressed nationalities.

They need to unite to discuss the political basis for a revolutionary working class party and to work out a programme of action, linking the struggle against the IMF with the struggle for a working class revolution in Pakistan and the entire region. In this way, we can fight back against the ruling class crisis and its attacks on the working class and poor in Pakistan.


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