Pakistan's IMF Bailout Brings Painful Rise in Inflation

In Pakistan, a nation already beleaguered by poverty, power cuts and security issues, inflation is on the rise, thanks to austerity measures implemented by the government to satisfy the stringent conditions attached to a bailout worth 6.6 billion US dollars from the International Monetary Fund (IMF).

The IMF approved the three-year loan package to stabilize Pakistan's economy as part of its Extended Fund Facility financial assistance program in September 2013. In return, it required that the Pakistani government impose strict austerity measures such as implementing budget cuts, slashing subsidies, increasing tax revenue, privatizing state enterprises that operate at a loss, and reforming the energy sector with price hikes. 

Potato and onion

Pakistan government is considering to ban exports of onion to end sharp increases in their prices. Image by Flickr user Olaf Kellerhoff. CC BY-NC

The government has slashed subsidies by 35 percent in an effort to comply, thereby increasing inflation and sending prices soaring in local markets.

Pakistan, like much of the developing world has been on a steady diet of IMF loans since the 80s. Some of the current loans are to repay old loans – “circular debt”. IMF's loan to Pakistan in 2008 was for $11.3 billion. Pakistan still owes IMF nearly $5bn from those loans for which interest is accruing. The biggest chunk in Pakistan's yearly budget is repaying IMF plans. So every year, health and education gets 2-3 % and repaying loans gets 25% of the annual budget.

Though Pakistan's Federal Minister for Finance and Revenue Ishaq Dar pointed out that his government, the five-month-old Pakistan Muslim League-(Nawaz) had “inherited a battered economy” and that ending subsidies was essential for the nation's self-reliance, inflation hit 9.1 percent in October 2013, the sharpest increase of last 16 months.

Graph depicting year-on-year (YOY) increase in inflation, measured by Consumer Price Index. Source: Pakistan Bureau of Statistics, Islamabad

Graph depicting year-on-year (YOY) increase in inflation, as measured by Consumer Price Index (CPI). Source: Pakistan Bureau of Statistics, Islamabad.

Food prices as well as prices of other basic necessities have skyrocketed. Because people's incomes are not increasing at the same rate as inflation, this has meant a stressful situation for many, especially those who survive on daily wages. According to an article in IRIN Asia, inflation in Pakistan has had a severe impact on food security in the country.

As reported by The Express Tribune, prices of perishable food items rose 18.6 percent, while the clothing and footwear group increased 14.6 percent. Against the backdrop of the government cutting down on subsidies and raising the power tariff, all of this has put intense financial pressure on the ordinary citizens of Pakistan.

Dissent has grown over the measures put in place to satisfy the IMF's terms. Digital content creator Rabab Khan commented on Google+:

Loans from international donors like IMF and World Bank, while intended to assist in implementing policies for inclusive growth, do not achieve their purpose due to their tendency to bring more inflation, economic instability, and unemployment to the country.

From their official Twitter account, opposition party Pakistan Tehreek-e Insaf tweeted a message from its chairman, former cricketer Imran Khan:

Journalist Osama Bin Javaid (@osamabinjavaid) reported:

Banker Sayem (@SayemZA) pointed to a graph showing how the Sensitive Price Indicator (SPI) has been moving up since the finance minister made his budget speech in June 2013:

Usama Usmani, an accounting student from Karachi, lamented:

For the middle and the lower middle class, the government's measures to generate revenue and its inability to control steeply escalating prices are proving to be back-breaking. In addition to the rise in prices, the government has been strictly imposing a ‘cash tax‘ on holdings in cash due to the high inflationary pressures, as the value of the Pakistani rupee has decreased dramatically.

The US dollar has reached an exorbitant high against the Pakistani rupee, fetching 108.27 rupees for one dollar, thus making  imports and loan repayment expensive. The IMF has accepted that with the decline in Pakistani rupee and the elimination of subsidies on electricity, inflation will increase. Moreover the crisis will worsen in the absence of economic development and employment opportunities.

To curb the insurmountable levels of inflation and to keep the struggling economy on track, on November 13, 2013, the State Bank of Pakistan raised its benchmark interest rate to 10 percent from 9.5 percent, hoping to ease price pressures and support the currency.

Only time will tell if the inflation will be stemmed, bringing much needed relief to the masses in Pakistan.

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