The International Monetary Fund (IMF) has underscored the critical challenges facing Pakistan’s economic stability. Delays in post-programme external financing disbursements and geopolitical uncertainties pose significant risks, while consistent policy implementation has shown promising signs of recovery.

In its latest report, the IMF has cautioned Pakistan about the risks of policy slippages and reduced external financing, which could jeopardize the country’s path to debt sustainability and exert pressure on the exchange rate after the Standby Arrangement (SBA) period.

Furthermore, it advocates for a revision of power tariffs, effective from July 1, to ensure alignment between tariff costs and revenue recovery, along with contingency measures in case of revenue shortfalls in May. Regarding its new program, the IMF staff has emphasized the persistently high downside risks. Although the new government intends to uphold the policies of the SBA, significant political uncertainty remains. Social tensions could resurge due to the intricate political landscape and high living costs, potentially hindering policy implementation and reforms.

The IMF underscores the critical importance of promptly notifying the annual rebasing for FY25 to prevent further escalation of circular debt (CD) flow, alongside intensified efforts for revenue collection, including the institutionalization of digital monitoring. Additionally, agricultural tube-well subsidy reform should proceed as planned by the end of FY24.

In its report following the completion of the second review and third tranche for Pakistan, the IMF indicates strong signs of economic stability, forecasting a 2 percent growth rate for this year and a subsequent increase to 3.5 percent in the next financial year. Inflation is expected to average 24.8 percent this year, decreasing to 12.7 percent next year, while unemployment is projected at 8 percent this year, with a slight decline to 7.5 percent next year. The fiscal deficit is estimated at 7.5 percent this year and is likely to decrease to 7.4 percent of GDP next year.

This year, the current account deficit is anticipated to be limited to minus 0.8 percent of GDP, with a further decrease to negative 1.2 percent next year. The IMF asserts that agreed contingency measures will be implemented if revenue collection falls short, with additional efforts required to meet the SBA’s revenue administration objectives. Delays in revenue collection efforts from retailers are noted, along with persistent challenges in the tobacco sector despite mandatory track-and-trace system implementation. Efforts to expand the track-and-trace system to other sectors like sugar, fertilizer, and cement are underway to enhance control over informal markets. The FBR has successfully registered 1.1 million new filers, with enforcement measures resulting in 170,999 new returns, while the rest have been voluntary submissions.

The IMF emphasized that delays in post-programme external financing disbursements would further strain banks, forcing them to finance the government more, which would exacerbate the crowding out of the private sector. Additionally, geopolitical factors such as higher commodity prices, shipping disruptions, or tighter global financial conditions could negatively impact external stability.

The consistent implementation of stronger policies over the past nine months has pulled the economy back from the brink and onto a path of stability. A gradual economic recovery has taken root, accompanied by a substantial decline in inflation in recent months, although it remains above target. Leveraging increased inflows, the State Bank of Pakistan (SBP) has begun replenishing foreign exchange reserves, easing external pressures and moderating the current account deficit. The State Bank of Pakistan (SBP) saw a significant surge in its foreign exchange reserves, hitting a two-year peak and surpassing the $9 billion milestone, thanks to inflows from the International Monetary Fund (IMF).

According to the latest data released by the central bank, the foreign exchange reserves rose to $9.120 billion by the end of the week on May 3. A statement from the bank indicated that during the week, SBP reserves soared by $1.114 billion to reach $9.120 billion, primarily attributed to the receipt of $1.1 billion from the IMF, marking the final tranche under the Stand-By Arrangement (SBA).

The country’s total foreign exchange reserves, including $5.338 billion held by commercial banks, amounted to $14.458 billion. Notably, the SBP’s reserves stood at $9 billion in mid-July 2022 but had been on a downward trajectory since then, hitting a critical low by the end of FY23 when the State Bank’s reserves plummeted to $4.4 billion in June 2023.

Fiscal performance has also improved, with the government achieving a significant primary surplus in the first half of the current fiscal year. This overall satisfactory performance indicates that unwavering and consistent policy implementation can yield positive results, rebuild confidence, and support economic recovery.

However, despite the SBA broadly achieving its immediate objectives, significant challenges persist, necessitating sustained efforts to address them effectively. Pakistan’s fiscal and external vulnerabilities remain very high, including risks related to debt sustainability, refinancing, and the crowding out of the private sector. Moreover, structural weaknesses continue to hamper productivity, investments, and growth. Recognizing that resolving these structural challenges will require ongoing adjustment and creditor support beyond the programme period, it is crucial that the momentum initiated under this SBA persists.

In this context, the interest shown by Pakistani authorities in a successor arrangement is welcomed, as it can help anchor policy adjustments in the coming years, restore Pakistan’s medium-term sustainability, and pave the way for robust and inclusive growth.

In conclusion, Pakistan stands at a pivotal juncture, with the IMF emphasizing the need for continued policy adjustments and international support to address looming fiscal and external vulnerabilities. The prospect of a successor arrangement holds promise in anchoring future policy reforms and fostering inclusive growth. With concerted efforts, Pakistan can manage its economic challenges and embark on a trajectory of stability and prosperity.