By Dr. Shubhda Chaudhary, MEI News, 12 May 2025
Pakistan, a nation of 254 million (25.4 crores), has once again turned to the International Monetary Fund (IMF) for financial rescue.
In September 2024, the IMF approved a $7 billion loan, Pakistan’s 24th bailout since 1958, to stabilize an economy teetering on the brink of collapse.
This latest package, part of a 37-month Extended Fund Facility, aims to address chronic balance-of-payments issues, but it comes with stringent conditions that could reshape Pakistan’s economic and social landscape. As Islamabad navigates this lifeline, its largest creditor, China, watches closely, balancing strategic interests with financial caution.
Why the IMF Stepped In
Pakistan’s economy has been battered by a confluence of crises. Foreign exchange reserves plummeted to $4.24 billion in early 2023, barely enough for three weeks of imports, while external debt soared to $130 billion by 2024. High inflation, peaking at 27% in 2023, and a weakening rupee exacerbated the cost-of-living crisis.
The 2022 floods, which caused $30 billion in damages and displaced millions, compounded these woes, alongside global commodity price spikes following Russia’s invasion of Ukraine.
The IMF’s intervention was driven by the need to avert a default, which could destabilize South Asia’s second-largest economy and a nuclear-armed state.
The $7 billion package targets fiscal discipline, requiring Pakistan to impose tax hikes, abolish exemptions, and sign a national fiscal pact to curb spending. Prime Minister Shehbaz Sharif, who secured the deal, hailed it as a step toward stability, but critics argue it entrenches a cycle of dependenc
A History of Bailouts
Pakistan’s relationship with the IMF began in 1950, shortly after its independence, when it joined the Fund to address fiscal challenges inherited from partition.
The first bailout came in 1958, a modest $25,000 standby arrangement to tackle a balance-of-payments crisis. Since then, Pakistan has secured 24 IMF nevertheless, totaling over $28 billion.
Key bailouts include a $6.5 billion package in 2008 under Asif Ali Zardari, the largest at the time, amid the global financial crisis, and a $6 billion deal in 2019 under Imran Khan, which stalled due to his populist subsidies clashing with IMF austerity demands.
The 2023 $3 billion standby arrangement narrowly averted default, but Pakistan’s structural issues—low exports, high debt servicing, and political instability—persist.
This cycle reflects a pattern: Pakistan implements reforms during IMF programs, only to reverse them during election years, as subsidies and populist policies resurface. “We go to the IMF, enforce strict measures for a few years, then reverse them,” says Dr. Sajid Amin Javed of Islamabad’s Sustainable Development Policy Institute.
Impact on Pakistan’s Economy
The $7 billion bailout has shown early signs of stabilizing Pakistan’s economy.
By August 2024, inflation dropped to 9.6%, the lowest since October 2021, and foreign reserves rose to $9 billion, bolstered by deposits from China, Saudi Arabia, and the UAE. The Pakistan Bureau of Statistics reported 3.07% GDP growth in Q4 FY24, driven by agriculture (6.76%) and services (3.69%), though industry lagged at -3.59%. Fitch and Moody’s upgraded Pakistan’s credit ratings to CCC+ and Caa2, respectively, reflecting cautious optimism.
However, the IMF’s conditions—tax increases equivalent to 3% of GDP and subsidy cuts—have sparked public discontent. Electricity and fuel price hikes have fueled protests, with some blaming the IMF for squeezing the poor. Debt servicing consumes 68% of tax revenue, leaving little for healthcare or education, where Pakistan spends just 1% of GDP per capita compared to 7% on debt. The World Bank warns that without structural reforms, growth will remain constrained, projecting 3.1% GDP growth for FY26.
Analysts like Uzair Younas argue that while the bailout provides “fiscal oxygen,” it’s akin to stabilizing a patient post-ICU, not curing the disease. Pakistan’s export competitiveness remains weak due to outdated infrastructure and high energy costs, exacerbated by IMF-imposed austerity that dries up investment.
China’s Response
China, Pakistan’s largest creditor with $30 billion in loans (30% of external debt), plays a pivotal role. Much of this debt stems from the China-Pakistan Economic Corridor (CPEC), a $65 billion Belt and Road Initiative project focused on energy and infrastructure, like Gwadar port.
Unlike IMF loans, Chinese financing lacks reform conditions but carries higher interest rates (3.7% vs. Paris Club’s concessional rates), with Pakistan paying $400 million in interest to China in 2019-20 compared to $7.6 million to Paris Club countries.
Beijing has been pragmatic, rolling over $2.4 billion in loans in 2023 and negotiating debt reprofiling in 2024 to delay $16 billion in energy sector payments and extend a $4 billion cash loan. Economists like Safiya Aftab suggest China’s generosity is driven by strategic rivalry with India and the US, aiming to maintain Pakistan as a geopolitical ally. However, China has resisted broader debt restructuring, complicating Pakistan’s talks with the IMF, which demands clarity on bilateral debt rollovers.
Some in Pakistan view Chinese loans as a “debt trap,” with CPEC power plants adding to fiscal strain through capacity payments to Chinese firms, even when production is low.
Yet, China’s investments have improved infrastructure, and Beijing’s reluctance to dictate economic policy contrasts with the IMF’s stringent oversight.
Geopolitical Tensions
The bailout has stirred significant geopolitical friction, particularly in the wake of the April 2025 Pahalgam terror attack in Indian-administered Kashmir, which killed 26 civilians.
India, attributing the attack to Pakistan-based militant groups like Jaish-e-Mohammed, fiercely opposed the IMF’s decision, arguing that the funds could be diverted to support terrorism or bolster Pakistan’s military amid escalating tensions, including Operation Sindoor.
The IMF, maintaining its apolitical stance, emphasized that the bailout was solely to prevent economic collapse and included safeguards to ensure funds are used for fiscal stabilization.
This decision drew criticism from Indian officials, who warned of regional security risks, while Pakistan rejected the allegations as baseless, accusing India of politicizing humanitarian aid.
The US, wary of Pakistan’s deepening ties with China, has also been accused of using the IMF to exert pressure. Deputy Prime Minister Ishaq Dar called delays in the 2024 bailout negotiations “a crime” against Pakistan’s economy, fueling perceptions of Western bias.
These tensions underscore the delicate balance the IMF must navigate in supporting Pakistan without alienating key global players
What Lies Ahead?
The IMF bailout offers Pakistan a lifeline, but its long-term success hinges on breaking the cycle of dependency. Structural reforms—boosting exports, broadening the tax base, and reducing reliance on imports—are critical but politically fraught. China’s continued support, while vital, complicates debt sustainability, with $90 billion in repayments due by 2028.
For ordinary Pakistanis, the immediate future is grim.
“The IMF helps us avoid collapse, but the poor pay the price,” says Karachi shopkeeper Ahmed Khan. As austerity bites and geopolitical tensions simmer, Pakistan’s path to stability remains fraught with challenges.
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