Rather than help Pakistan avoid a default and other economic calamities, the IMF is willing to drive millions of more people into poverty.

Pakistan is currently negotiating with the International Monetary Fund for the release of over $1 billion in much-needed economic aid. This installment is part of a nearly $7 billion dollar bailout package that was initiated in 2019 under the IMF’s Extended Fund Facility (EFF). The EFF has been designed to provide financial assistance to countries facing balance-of-payment issues.

The ongoing negotiations are happening at a time when Pakistan is facing a steep economic crisis with inflation, poverty, and unemployment all on the rise.

I argue that the current bailout package and its focus on curtailing critical subsidies in health and energy is exacerbating the economic vulnerabilities of Pakistan’s poor. What Pakistan needs more than anything else is closer cooperation between the government and the IMF in expanding and strengthening social programs to ward off a poverty crisis.

Pakistan desperately needs an early release of the $1.1 billion installment as it faces a real risk of default. The country’s central bank foreign exchange reserves have decreased by 16%, to $3 billion since the ouster of Imran Khan’s government in 2022. This amount is barely enough for less than three weeks of import. This shortage in foreign exchange means that many imports including raw materials for critical industries are scarce or unobtainable. This shortage is exemplified in another way as well: many ships loaded with imported goods are stuck at the Karachi Port because local banks are unable to open letters of credit. Importers are facing financial losses for stuck goods as well as industry closures.

Pakistan is facing historic levels of inflation at 27%, the highest since 1975, with the costs of perishable food items rising to 60% in January.

Even before the current economic crisis, a greater chunk of the population was living on the edge. For example, according to the World Bank, nearly 39% of the population lived under the poverty line in 2018. Similarly, according to the World Food Programme, around 20% of the population was undernourished, while 44% of children under 5 suffered stunted growth. According to the Asian Development Bank, out of every 1,000 live births, 65 children died before reaching their fifth birthday.

The crisis of poverty and food scarcity became exacerbated by recent flooding which affected 33 million people. According to UNICEF, things haven’t improved for millions of people. “Months after unprecedented floods ravaged Pakistan, vast swathes of cropland and villages remain under water, while nearly 10 million girls and boys remain in need of immediate, lifesaving support.”

Adding misery to Pakistan’s poor, on January 29, the IMF demanded that the government withdraw subsidies on fuel, which will drive up costs. Similarly, the central bank removed the artificial capping of the foreign exchange rate, resulting in a drastic depreciation of the rupee, including a 9% loss in one day. Similarly, the government suspended a $14 billion health insurance scheme exposing 120 million people in Punjab to health disparities. Aside from the withdrawal of critical health and energy subsidies, the IMF has demanded that the government increase the general sales tax to 18%. The imposition of taxes would further impact Pakistanis as the price of basic goods will rise.

Many fear that rising inflation and the withdrawal of critical energy, health, and social subsidies will drive millions more into poverty. Patricia Gossman, the Asia Director of Human Rights Watch, said recently that “Millions of Pakistanis have been pushed into poverty and denied their fundamental social and economic rights.” Gossman further stressed: “The IMF and the Pakistani government have a responsibility to address this crisis in a way that prioritizes and protects low-income people.”

While ensuring financial discipline and other structural reforms is the core mission of the IMF, it is important for both the institution itself and its wealthy members to realize that the withdrawal of energy, health, and social subsidies and higher taxes often impacts the world’s poor in developing countries.

For the sake of Pakistan’s poor and to avoid a collapse of the government, which happens frequently, the IMF should provide time and policy space to the government for achieving an “inclusive and right-based” economic recovery. Similarly, taxation and the withdrawal of critical subsidies should be conditioned so that the poor don’t suffer more than other economic classes. Additionally, the government should use a major portion of international funding to expand social protection programs to shield the most vulnerable from rising inflation, currency depreciation, and endemic levels of poverty. Essentially, the IMF’s mission shouldn’t be to ensure that millions of more people in Pakistan and elsewhere live in misery.