In recent times, Pakistan has been recently struggling with crippling economic issues, often on the brink of financial collapse, only to be bailed out by an International Monetary Fund (IMF) loan. The most recent US$7 billion loan agreement mirrors the IMF’s past interventions with many other economically failing nations—prompting questions of whether these loans are truly beneficial or simply postponing the inevitable. While the IMF offers temporary respite, the outcomes of these loans result in profound changes, such as reshaping the government, costing the loss of thousands of jobs, and spearheading a trail of unstable debt. Pakistan’s recent loan deal is not unique, with countries like Nigeria and Sri Lanka also relying on the IMF to face similar challenges. IMF deals and the impact of financial lending sparked a global discussion surrounding financial lifelines and whether they provide meaningful assistance or a never-ending dependency on borrowing money from the IMF.
In the latter half of September 2024, the International Monetary Fund (IMF) passed a US$7 billion loan deal with Pakistan’s government to reduce expenditures and increase tax revenues. This loan came after 2023 when the government of Pakistan was about to default, but it was saved by a US$3 billion loan also provided by the IMF. The aftermath of these deals was nothing short of both a blessing and a curse, with the initial bailout loan in 2023 supposedly providing short-term relief by increasing foreign direct investment. Even though the IMF has provided many forms of economic relief to Pakistan in the past, the addition of the new US$7 billion loan calls into question whether these loans are helping in the first place. Upon receiving the financial aid package, the Pakistani government abolished 150,000 government jobs, merged two ministries, and closed six more. Such drastic measures do call into question the usefulness of these loans. Why has previous foreign funding from Saudi Arabia of approximately US$2 billion failed to showcase an impact, or as mentioned previously, the 23 relief form programs show any significant effect on the economy? Much of which only adds to Pakistan’s over US$25 billion debt.
Pakistan is not an isolated event. The IMF has provided loans to many countries, and as of October 4th, 2024, it had provided over 111 billion dollars to countless countries. Nigeria and Sri Lanka, in the same situation as Pakistan, also agreed to IMF deals to combat current economic issues plaguing their countries. For the past couple of years, Nigeria has seen the price of the naira drop in parallel with the cost of oil, causing the country’s GDP to fall drastically, calling for a loan of 3.4 billion dollars from the IMF. The loan aimed to combat the ever-growing economic issues in Nigeria, focusing on mitigating the financial impact of the pandemic and the sharp fall in international oil prices.
Similarly, in 2022, Sri Lanka agreed to a US$2.9 billion IMF loan to combat inflation, which was at a record high of 74% the year prior. The loan given to Sri Lanka provided both beneficial and problematic outcomes. Sri Lanka used the loan to achieve meaningful economic growth and increase the value of the Sri Lankan rupee. Yet, at the same time, poverty doubled, while low wages still occurred in the country, with real wages diminished by 16.9% in the private sector and 22% in the public sector between 2021 and 2024. Addressing this issue is crucial in determining the sustainability of IMF loans. In a study comparing countries from 1986 to 2016, IMF loan arrangements that pertain to structural reforms (which can be seen in Pakistan) often trapped more people in the poverty cycle, lowered government revenue, increased basic insurance costs, and more — showcasing the drawbacks of IMF loans. If IMF loans truly benefit developing countries and provide long-lasting effects, wouldn’t there be fewer struggling nations? The IMF also provides advisory assistance in addition to financial. However, the issue is that Structural adjustment programs (SAPs) are short-term. However, based on information, SAPs tend to cause several prolonged issues due to the financial monitorization that promotes currency stability and its controls on inflation. Due to the liberalization of exchange rates, these changes affect the poorest households, making imported goods unaffordable. The rigorous changes countries must make are not fully thought out, and countries are left with a system they know little about without the aid of the IMF. This issue permeates into a never-ending cycle of dependency on IMF loans.
To some, IMF loans may be seen as a blessing. Many countries use these loans provided by the IMF to solve economic issues that hinder economic growth. As a previous example, Nigeria was severely hampered by COVID-19 and the drop in oil prices. The loan provided to Nigeria did not cause severe impacts on the overall structure of the government, unlike Pakistan, but this does question whether loans help at all. In the case of Pakistan, the layoffs and abolishment of several ministries in the government were in response to agreements made by the IMF to provide the loan in the first place. Countries must make difficult commitments to fulfill loan contracts, but these obligations are established for a reason. The IMF cannot act like a piggy bank; instead, it monitors how countries implement policy actions, expecting them to address internal economic issues with sustainable outcomes through these hefty loans. Even though it can be seen in the long term that IMF loans tend to impact a country negatively due to the overbearing requirements the countries have to follow to meet the demands of said loan, causing a myriad of compounding issues. In the short term, under IMF monitoring, loan deals play a crucial role in bouncing back a country’s economic situation, but this only adds to the country’s dependency on IMF loans. Ultimately, while IMF loans can provide short-term financial relief and stabilize economies in crisis, their long-term effects often exacerbate dependency — leaving countries trapped in cycles of debt and austerity measures that hinder sustainable growth. This is why many nations, after receiving IMF assistance, have struggled to repay their debts fully or have found themselves returning for additional loans — underscoring the limitations of these financial interventions in fostering true economic independence.
Edited by Aimee Wang
4th Year McGill student pursuing an East Asian Studies major with a minor in Communications.