What Assurances Did the US Seek from Pakistan to Support its Case with the IMF?

In a surprising turn of events, Pakistan was able to secure a $3 billion lifeline from the International Monetary Fund (IMF) just when the lender’s previous Extended Fund Facility (EFF) crashed on June 30. The deal offers immediate relief to both Pakistan and countries with stakes in Pakistan’s stability, as it ensures that Islamabad will not default for the next six to nine months. 

The deal’s nine-month timeline is designed only to cover three quarters (July 2023 to April 2024) of the current fiscal year, including the period of a caretaker government ahead of general elections. Pakistan has reportedly assured the IMF that elections will take place during the timeline of the current deal and a new government will come to office at the end of this year or by early next year.

As per the nine-month stand-by arrangement (SBA) deal, $1 billion has been given to the current government, $1 billion will be given to the caretaker government ahead of the elections, and $1 billion to the next government after the elections.

This unexpected outcome raises questions about how this feat was accomplished, especially considering that Pakistan was unable to implement upfront harsh conditions regarding structural reforms. An important factor that made this deal possible was the support and approval of the United States. The approval of the IMF deal for Pakistan, however, has raised questions about whether Washington asked Islamabad for any quid pro quo against China.

As a strategic competitor and rival in Pakistan's policymaking circles, it is natural to wonder if the U.S. leveraged its influence at the IMF and over Pakistan to gain advantages over China.

Michael Kugelman, the director of the South Asia Institute at the Wilson Center, cautions against overstating U.S. influence over the IMF. He acknowledged there is influence from being the largest shareholder in the fund, but it would not be accurate to claim that the deal was solely the result of U.S. involvement. “The deal primarily came through because Pakistan took the necessary policy steps to meet IMF conditions… that it had resisted for months,” he argued.

Faran Jaffery, deputy director of Islamic Theology of Counter Terrorism (ITCT), a U.K.-based think tank, concurs that the approval of the deal was more likely based on Pakistan's economic situation and financial needs than any specific demands.

More than the American role, it is Pakistan’s own conduct and policies that play a critical role in convincing the economists at the IMF, "and as is well known, there were occasions, especially during the last few months of Imran Khan’s government, when the IMF did not like what it was seeing in Pakistan in terms of economic decisions," Jaffery said.

Pakistan refused to agree to IMF-dictated reforms for months, but when it saw it had no other choice, the country caved. As part of the current deal, the IMF has demanded that Pakistan fix its power sector. Additionally, the fund has urged Pakistan's central bank, the State Bank, to completely withdraw import restrictions aimed at controlling external dollar payments and instead implement a market-determined exchange rate for the currency.

In its recommendations, the IMF has also highlighted the importance of proactive measures by the State Bank to reduce inflation and suggests increasing the policy rate to a minimum of 22 percent. Furthermore, the IMF has demanded a clear roadmap to address losses in state-owned enterprises, which have been putting significant strain on government finances. The IMF has also suggested that Pakistan seeks additional loans from other donors to help alleviate the current financial burdens and prepare the ground to repay around $22 billion in debt owed by the country to foreign lenders during the current fiscal year.

It is unlikely that U.S.-China competition affected Pakistan's IMF negotiations, according to Kugelman. "Despite the IMF's U.S. support, Beijing is likely to have supported a deal with the IMF [as well] because it would provide a sense of stability to an economy in which China wants to invest," he noted. 

At the same time, he said, Pakistan's IMF deal shouldn't be seen as a strategic triumph for Washington in its competition with Beijing. China's commercial and economic footprint in Pakistan is much larger than that of Washington's and the IMF deal doesn’t change that reality.

According to Kugelman, it is unlikely Islamabad’s negotiations with the IMF were part of a broader quid pro quo arrangement with Washington. "To be sure, there were meetings and calls between U.S. and Pakistani officials about the IMF talks in the weeks and months before the deal. And those meetings likely entailed U.S. officials urging Pakistan to take the necessary fiscal policy steps to meet IMF conditions, and Pakistani officials discussing their plans to do so, " Kugelman said. 

"I don't expect the two sides were discussing what to give each other in order to make the IMF deal happen,” he said, stressing “that's not how these things work."

Analysts agree that the IMF deal itself will not play a significant role in undermining China’s interests in Pakistan. "I don’t think Beijing itself is that worried about the IMF deal. After all, this is not the first time for Pakistan, and probably not the last," said Jaffery. 

Kugelman agrees: "The deal won't dent China's interests in Pakistan as all the previous IMF deals with Pakistan didn't undermine China's interests in Pakistan.” Chinese investment and broader engagement continued uninterrupted, he noted. "Why should this latest deal be any different?" 

If anything, Pakistan must have involved the U.S. to assure the IMF that it will not deviate from the terms agreed to with the fund, as it did during Khan's time as prime minister. The nine-month deal appears to have more to do with Pakistan's domestic politics and economic measures than any geopolitical reasons associated with the competition between China and the United States. There will be no non-budgeted investments in Pakistan during the upcoming election season, no political parties can propose development budgets before elections, nor will Pakistan embark on projects that will result in a current account deficit in excess of what has been agreed with the IMF.

Both China and the U.S. don't want a nuclear-armed Pakistan to default or destabilize. Beyond their mutual competition, both countries want Pakistan, an important South Asian nation, to maintain some semblance of stability.

This is not to say that the U.S. is unconcerned by China's growing influence in Pakistan. Over the years, Washington has raised concerns about shadowy loans Pakistan has obtained from Beijing and has also expressed reservations about China's possible military deployment in Pakistan under the Belt and Road Project (BRI). While Pakistan has quietly assured the U.S. that its interests will not be threatened by its partnership with China, Washington remains wary and may seek a tougher stance with Pakistan in the near future. 

Pakistan may face tough times in the coming months as it will need to engage with the IMF in a much broader and longer-term manner, which may bring into question Pakistan’s partnerships with China and the United States.