Amid a worsening financial crisis, Pakistan’s economy has been dealt another blow as the World Bank canceled a $500 million loan for a clean energy programme. The loan, initially aimed at supporting sustainable energy initiatives, was revoked after Pakistan failed to implement key conditions tied to the agreement, including revisions to power purchase agreements under the China-Pakistan Economic Corridor (CPEC), according to The Express Tribune.
This cancellation comes at a precarious time for Pakistan’s cash-strapped economy, which has been grappling with structural inefficiencies, rising inflation, and a ballooning debt burden. To add to the woes, the World Bank has also announced that it will not approve any new budget-supporting loans for Pakistan this fiscal year, compounding fears over the country’s dwindling foreign reserves.
Cycle of bailouts, crisis and IMF’s bailout package
In September, Prime Minister Shehbaz Sharif secured a $7 billion bailout package from the International Monetary Fund (IMF). This was Pakistan’s 25th approach to the IMF, with the country heavily relying on international financial aid since 1958. Despite this lifeline, Islamabad continues to struggle with weak economic fundamentals, including sluggish growth, soaring unemployment and a worsening brain drain.
A recent ILO report shed light upon the alarming unemployment rate, while studies by Karachi-based Pulse Consultants indicate that nearly one million workers have emigrated from Pakistan since 2008 — a trend that is accelerating as economic opportunities dwindle.
Anemic growth and mounting challenges
The country’s economic growth plummeted to 2.4% in 2023, trailing behind its population growth rate of 2.6%, which exacerbates poverty levels. The combination of weak tax revenues — standing at only 12% of GDP — and expenditures of 20% highlights Pakistan’s worsening fiscal imbalance. Economic analyst Shahbaz Rana from the United States Institute of Peace notes that sectors such as energy and state-owned enterprises continue to hemorrhage resources, while external accounts face mounting stress due to low exports and foreign direct investment alongside high import dependency.
In 2023, Pakistan narrowly escaped a default-like situation after securing an emergency stopgap deal with the IMF. However, as the agreement concluded earlier this year, the country remains vulnerable.
Will IMF’s $7 billion bailout package help stabilise Pakistan’s economy?
The IMF’s new programme seeks to stabilise the cash-strapped country. While the IMF’s measures focus on critical areas such as broadening the tax base and improving government transparency, doubts linger about the programme’s ability to address deep-rooted structural challenges that have plagued Pakistan’s economy for decades.
The IMF programme prioritises revenue generation, pushing for higher taxes and subsidy removals, but neglects to address excessive government spending. Pakistan’s borrowing spree to fund both development and nondevelopment expenses has driven domestic debt and interest repayments to unsustainable levels. Alarmingly, over 50% of the annual budget is consumed by interest payments alone. The unchecked spending, including allocations tied to political patronage, remains a critical area unaddressed by the IMF plan.
The country’s energy sector faces similar neglect. While the IMF mandates energy tariff hikes to bolster revenue collection, it fails to reform the underlying cost structure of energy production. Rising tariffs could increase the cost of production, further hindering industrial growth and exports, which are essential to long-term economic independence. This stabilisation-focused approach risks perpetuating Pakistan’s reliance on external financial support.
Debt woes and Chinese factor
Pakistan’s debt sustainability continues to be a primary concern, particularly with its growing reliance on Chinese loans. China remains Pakistan’s largest external creditor, holding $23.6 billion in bilateral debt — surpassing the World Bank’s $20.1 billion. In total, Chinese loans account for over 28% of Pakistan’s external public debt. This dependency could complicate future debt restructuring efforts, especially as Islamabad navigates the delicate balance between IMF directives and Chinese interests.
The new IMF programme also comes with a critical precondition: halting incentives to Chinese investors. Pakistan is required to discontinue tax breaks and subsidies for Chinese companies operating in special economic zones (SEZs) under the China-Pakistan Economic Corridor (CPEC). This marks a significant setback for Pakistan, which had envisioned nine SEZs to attract Chinese investments. Earlier this year, Prime Minister Shehbaz Sharif’s efforts to revive Belt and Road Initiative (BRI) projects in China ended without success, signaling a broader decline in Chinese investments — dropping from 25% in 2023 to 22% in 2024, according to the World Bank’s International Debt Report 2024.
Stabilisation vs long-term growth
While the IMF programme can bring short-term stability, its success hinges on Pakistan’s political will to implement unpopular reforms, particularly tax measures and subsidy cuts. However, stabilisation alone will not solve Pakistan’s economic woes. The country must go beyond IMF prescriptions to tackle structural inefficiencies, debt sustainability and long-term competitiveness.
Without deep reforms and a clear development strategy, Pakistan risks remaining trapped in a cycle of IMF bailouts, struggling to break free from its recurring economic crises. The question now is whether Islamabad can use this opportunity to secure a sustainable economic future — or remain dependent on external support.
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