Pakistan – IMF Bailout Review

Pakistan – IMF Bailout Review

Why in News? 

On 9 May 2025, the Executive Board of the International Monetary Fund (IMF) is scheduled to hold a meeting. In this meeting, a decision will be made on whether to release the next tranche of $1.3 billion to Pakistan under the Climate Resilience Loan Program.

• Following the recent terrorist attack in Pahalgam, India may participate in this meeting for the first time and vote against Pakistan.

IMF Bailout for Pakistan and Its Importance

• IMF Bailout

• • • The International Monetary Fund (IMF) has extended a bailout package to support Pakistan’s struggling economy.
    • In July 2024, Pakistan and the IMF agreed on a $7 billion Extended Fund Facility (EFF) program.
    • This program is spread over 37 months and includes six reviews, through which the loan is disbursed in installments.
    • The main goal of this package is to promote structural economic reforms in Pakistan and bring greater stability to its financial system.
    • On 9 May 2025, the IMF Executive Board will meet to review the first phase of the EFF program and decide on releasing an additional $1.3 billion loan under the Climate Resilience Loan Program.

• Importance of the Bailout:

• • Pakistan’s $350 billion economy is facing a serious financial crisis.
  • Rising external debt, high inflation, and the falling value of its currency are weakening the economy further.
  • In such a situation, the IMF bailout has become Pakistan’s key hope for financial relief and regaining global financial support.
  • If this assistance is withheld, the country may face deeper fiscal deficits and growing social unrest.

What is IMF’s Climate Resilience and Sustainability Facility (RSF)?

• The International Monetary Fund (IMF) has launched the Climate Resilience and Sustainability Facility (RSF) as a new initiative to help countries deal with climate change and global pandemics.
• This facility is designed to provide long-term and affordable financial support to low-income and vulnerable middle-income countries.
• Under the RSF, countries can receive low-interest loans for a period of 15 to 20 years.
• The purpose of this support is to help countries reduce the impact of climate change, increase resilience against natural disasters, and promote green development.
• The RSF encourages countries to introduce policy reforms in areas such as energy efficiency, green transportation, water resource management, and climate risk insurance.
• A key condition of the RSF is to ensure that the loan benefits the poor and climate-vulnerable communities.
• This facility acts as a complement to the IMF’s traditional lending programs such as the Stand-By Arrangement (SBA) and the Extended Fund Facility (EFF).

What is an IMF Bailout for Distressed Economies?

• An IMF bailout refers to financial assistance provided to countries facing severe economic crises, such as currency devaluation, debt overload, or fiscal imbalance.
• This assistance can be in the form of loans, cash support, or Special Drawing Rights (SDRs), helping countries stabilize their foreign exchange reserves and meet essential import and debt obligations.
• SDRs are international reserve assets based on five major global currencies: US Dollar, Euro, Chinese Yuan, Japanese Yen, and British Pound.
• Countries use SDRs to make foreign payments, maintain exchange rate stability, and support import requirements.
• IMF provides bailouts through various programs like:

• Extended Credit Facility (ECF)
• Stand-By Arrangement (SBA)
• Flexible Credit Line (FCL)

• • Each program has specific conditions and goals, based on the economic situation of the country.

• Conditions for IMF Bailouts:

• • • Structural reforms: The country must restructure its economy by reducing or removing subsidies.
    • Tax reforms: The country must improve revenue collection and strengthen tax systems.
    • Regulatory simplification: Processes such as licensing, permits, and inspections must be made easier.
    • Fiscal discipline: The country is required to cut unproductive spending and prioritize sectors like education and health.

• Steps in the Bailout Process:

• • Formal request: The distressed country officially applies to the IMF for help.
  • Economic assessment: IMF reviews the country’s current economic and financial condition.
  • Crisis verification: If the situation is found critical, IMF begins the next steps.
  • Support proposal: IMF recommends a suitable bailout or loan arrangement.
  • Approval and conditions: The package is approved with mandatory policy reforms.

Impacts of IMF Bailouts

• Positive Effects:

• • • Economic safety net: IMF support gives countries a chance to recover from crises.
    • Prevents financial collapse: Bailouts prevent national banking systems from collapsing.
    • Protects market structure: Key institutions essential for market functioning are supported.
    • Technical guidance: IMF offers expert advice and technical support for policy implementation.
    • Boosts global confidence: After IMF support, other global institutions also feel confident to assist.

• Negative Effects:

• • Harsh conditions: Spending cuts and tax hikes can lead to hardship for citizens.
  • Damage to image: Bailouts are seen as economic failure, reducing investor confidence.
  • Dependence risk: Repeated bailouts can reduce self-reliance and slow reforms.
  • Public unrest: Austerity measures may lead to protests and internal instability.