Introduction
There are several reasons why Pakistan has persistent economic problems. One is the country’s large military expenditure, which takes up a significant portion of the government budget (2019). Another is the high rate of tax evasion in Pakistan, which reduces government revenue. In addition, Pakistan has several state-owned enterprises that are inefficient and poorly managed, and these drain resources from the economy. Finally, the country has been slow to reform its tax system and has not taken steps to privatize state-owned enterprises, which would make the economy more efficient.
Discussion
The IMF bailout is designed to improve Pakistan’s fiscal situation by solving part of the persistent economic problems. However, the IMF requires the country to reduce its budget deficit and improve its tax collection (2019). If implemented correctly, these measures should improve Pakistan’s financial situation. However, it is essential to note that Pakistan has a history of not complying with the conditions attached to IMF loans, so there is no guarantee that the country will take the necessary steps to improve its finances.
For Pakistan to get an IMF loan, its currency devaluation should be controlled since the devaluation is likely to have various impacts on the Pakistani economy. Currency devaluation will make imports more expensive, likely leading to inflation. It will also make it more difficult for Pakistan to service its foreign debt obligations (2019). Furthermore, it may lead to further capital flight from the country as investors deem it unfavorable for business. As the value of currency drops, the Pakistani government will find it hard to meet the conditions attached to the IMF loan.
Despite currency devaluation making it hard to loan Pakistan, the IMF should continue to give funds to the country because it aids in better operation within different areas. The country has suffered from terrorist attacks itself and in recent years. The funds from the IMF help finance the military to keep the country secure from terrorism. Another reason is that Pakistan has a history of reforming its budget deficit and tax system and privatizing state-owned enterprises: however, implementing them has not always been successful (2019). The other reason for continued funding to Pakistan is that they are an essential source of oil and gas. The country has the seventh-largest proven reserves of natural gas in the world.
Pakistan plays a vital role in the economic trade in Asia, like being a source of oil and gas to countries like China. However, when it comes to relieving the financial burden from Pakistan, China does not have an obligation to help Pakistan with its economic crisis, although it may choose to do so for strategic reasons (2019). China is a significant investor in Pakistan through its Belt and Road initiative, and it has loaned the country billions of dollars for infrastructure projects. However, Pakistan will be required to repay them with interest, and if Pakistan cannot repay its loans, China may choose to foreclose on its assets.
Conclusion
Even with the non-obligatory relationship between Pakistan and its economic allies, there are a few reasons why an international business should care about Pakistan receiving an IMF loan package. The international business should understand that the conditions of the loan may lead to economic reforms that could improve the business environment in Pakistan. Also, the IMF loan may help stabilize the Pakistani economy and prevent a more severe economic crisis, leading to increased financial stability and predictability. Another reason is that the IMF loan package may help reduce Pakistan’s trade deficit, leading to increased demand for Pakistani exports (2019). There is the possibility that the IMF loan package may help to reduce Pakistan’s budget deficit to aid in increasing government spending on infrastructure and other projects.
Reference
(2019). Pakistan. IMF Staff Country Reports, 19(212), 1. Web.