FeaturedNationalVOLUME 19 ISSUE # 17

Debt dilemmas and IMF negotiations

The economic situation in Pakistan for the current financial year holds promises of marginal growth, buoyed by projections from international financial institutions forecasting a potential decrease in inflation from 29% to 23%. However, beneath the surface of this optimistic outlook lie pressing concerns about the efficacy of this growth in addressing the multifaceted challenges faced by millions, especially in terms of unemployment. Complicating matters, doubts arise about the feasibility of achieving price reductions given the stringent conditions imposed by the International Monetary Fund (IMF) under an existing loan package.

Compounding the economic intricacies is the stark reality of a debt-to-GDP ratio surpassing 70%, with domestic debt constituting 60% of the total debt and a staggering 85% of the interest burden. The external debt, predominantly in dollars, is owed substantially to bilateral and multilateral creditors, with China holding a substantial 13% share, primarily directed toward infrastructure projects. Pakistan’s reliance on tax and gas tariff hikes, coupled with a sharp depreciation of the rupee, has contributed to a significant 30% year-on-year inflation rate, further straining the local currency.

With the current $3 billion IMF package drawing to a close, the government’s immediate focus is on securing a larger financial arrangement. Analysts underscore the pivotal role that debt negotiations will play in upcoming talks with the IMF, aiming to garner support for revitalizing the struggling economy. Discussions are poised to encompass the release of the final tranche of the expiring loan package and the initiation of talks for a new three-year arrangement, this time worth $6 billion.

The IMF has shown eagerness to engage with the new government on both financial packages. As the upcoming finance minister of Pakistan prepares for the foreign task at hand, representing the nation at the IMF and World Bank’s annual spring meetings in the coming month, the stakes are high. These meetings, scheduled from April 17 to 19, will play a pivotal role in shaping Pakistan’s negotiating stance and soliciting international support to steer the country towards economic recovery.

Notably, India has entered the fray, expressing concerns to the IMF about ensuring that any financial assistance to Pakistan is not diverted for defence expenses. While the influence of India’s plea on the IMF’s decision remains uncertain, the prevailing political stability or instability in Pakistan is expected to significantly mold the country’s position in negotiations for loans with international lenders. The unfolding intricacies of these discussions will shape the trajectory of Pakistan’s economic resurgence in the weeks to come.

Meanwhile, Moody’s Investors Service has upgraded the outlook of Pakistan’s banking sector from ‘negative’ to ‘stable’ as macroeconomic challenges and fiscal pressures show signs of easing. The report highlighted the banking sector’s solid profitability, stable funding, and liquidity, which collectively provide a sufficient buffer against the country’s macroeconomic challenges and political uncertainties.

According to the report, the forecast for the Pakistani economy suggests a return to modest growth, projecting a 2% expansion in 2024 after subdued activity in 2023. Additionally, it anticipates a decrease in inflation to around 23%, down from 29% the previous year. Despite this positive outlook, the report cautions that high-interest rates and inflation will continue to restrain private-sector spending and investment. Moreover, banks are found financing the government’s wide fiscal deficits, leaving limited room for lending to the real economy. The report notes that initiatives to deepen financial inclusion and support key sectors will only partially alleviate credit demand.

Moody’s emphasizes the substantial exposure of Pakistani banks to the government through large holdings of government securities, constituting approximately half of total banking assets. This connection links the credit strength of the banks closely to that of the sovereign. External pressures, persistent against a challenging operating backdrop, are expected to slightly weigh on the performance of Pakistani banks’ loan portfolios.

While the credit rating agency anticipates continued strong profitability for the banking sector due to wide net interest margins (NIMs), it predicts a decline from 2023 peaks owing to subdued business growth, increased funding costs associated with higher rates, and elevated taxes. Operating expenses are expected to stabilize in line with easing inflation and banks’ cost-control efforts. However, persistently high tax rates and potentially higher loan-loss provisions may impact bottom-line profitability, with the return on average assets hovering around 3%, according to Moody’s.

Moody’s anticipates that Pakistani banks’ modest capital ratios will remain stable, with strong earnings offsetting high dividend payouts. The stable deposit-based funding of banks is expected to continue supporting financial stability. For the top five largest banks in Pakistan, namely the National Bank of Pakistan (NBP), HBL, UBL, MCB, and Allied Bank Limited, Moody’s assigns a baseline credit assessment of Caa3.

In conclusion, Pakistan finds itself at a critical juncture, facing economic challenges, formidable debt burdens, and crucial negotiations with the IMF. The prospects of marginal growth are underscored by concerns about its impact on unemployment and the feasibility of achieving price reductions. As the nation grapples with a high debt-to-GDP ratio and external pressures, the upcoming talks with the IMF will determine the course of Pakistan’s economic recovery. The involvement of India adds a geopolitical dimension, further emphasizing the delicate balance required in navigating both internal and external factors. The weeks ahead promise significant developments, offering insights into Pakistan’s resilience and determination to chart a sustainable economic path.