IMF’s late remorse on lending to Pakistan

The International Monetary Fund (IMF) is experiencing a “lender’s remorse” on its controversial loan for Pakistan that its executive board approved on  May 9. The approval was made in the teeth of India’s opposition even as drones and missiles were lobbed on its territory.

The IMF has approved a lending package that comprises $1 billion in Extended Fund Facility (EFF) and another $1.4 billion under the Resilience and Sustainability Facility (RSF).

A supplementary note that was written by the Fund’s Middle East and Central Asia Division on 7^th May–before the IMF board approved the loan—stated that, “Reputational risks could also come from any perceived lack of even-handed or if there was a perceived misuse of Fund disbursements.” The document also noted that, “The rising tensions between India and Pakistan, if sustained or deteriorate further, could heighten enterprise risks to the fiscal, external and reform goals of the program.”

Clearly, this input was available to the IMF Board before it took the lending decision for Pakistan. Yet, in a release after the approval, the Fund watered down this risk to a mere boilerplate observation that, “Pakistan has made important progress in restoring macroeconomic stability despite a challenging environment. Since the approval of the Extended Fund Facility, the economy continues to recover, with inflation sharply lower and external buffers notably stronger. Risks to the outlook remain elevated, however, particularly from global economic policy uncertainty, rising geopolitical tensions, and persistent domestic vulnerabilities.”

Had the note of 7^th May not been available to the Fund’s board, one could claim that “political factors” were not a part of its decision-making matrix. But that note exists and was available to the Board before it took a decision.

India objected to the disbursal of the loan—of which $1 billion were made available to Pakistan immediately—but could do little against the numbers stacked in favour of Islamabad. It is worth noting that soon after India hit terrorist camps at Bahawalpur (Jaish-e-Muhammad) and Muridke (Lashkar-e-Taiba), Pakistan’s Prime Minister Shehbaz Sharif “compensation” of Rs14 crore to Masood Azhar, the founder and leader of Jaish-e-Muhammad. This was for 14 of his family members being killed in the Indian strike. Azhar is a UN designated terrorist.

The IMF can, of course, wash its hands off the affair as it can say that this was not the purpose for which the loan was extended to Pakistan. But this is a weak excuse. The truth is that while IMF minutely monitors spending of its funds by countries, it suffers from a lack of will to take Pakistan to task. Pakistan has availed an IMF lending facility in one form or another every 2.5 to 3 years on an average since 1958. This clearly has not helped it as these loans are often frittered away or when the country’s economic situation improves a bit, it abandons the IMF’s reform prescriptions. Yet, the IMF returns with big packages a couple of years later.

This time it is different. For the first time IMF has lent money to Pakistan when it was actively involved in hostilities against India and there is a good chance that money was used for offensive purposes against India. IMF truly risks running reputational costs. It must reconsider its lending practices to rogue states like Pakistan.

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