FeaturedNationalVOLUME 19 ISSUE # 1

Economic challenges and adjustments

In the dynamic landscape of Pakistan’s economy, recent developments have prompted significant adjustments, particularly in the wake of revised projections by the International Monetary Fund (IMF). This overview delves into key shifts in foreign loan requirements, economic growth, inflation, and other crucial indicators, shedding light on the complexities faced by the nation. From fluctuations in the rupee-dollar parity to the intricacies of foreign exchange reserves, we navigate through the factors influencing Pakistan’s economic trajectory.

The International Monetary Fund (IMF) has adjusted Pakistan’s foreign loan requirements for the current fiscal year to $25 billion, marking a reduction of $3.4 billion. Simultaneously, the IMF has revised the economic growth projection downward to 2%, rejecting the government’s external and macroeconomic forecasts.

In addition to the decrease in foreign loan requirements, the IMF has also lowered its inflation projection for the fiscal year to 22.8%, down from the earlier estimate of 25.9%. The finance ministry’s projections for the current account deficit (CAD), imports, economic growth, inflation, and gross financing requirements were not accepted by the IMF. These adjustments were made during the first review talks, contrasting with the estimates from July of the same year. The revisions include changes to the gross external financing requirements, encompassing funds needed to cover the CAD and repay maturing debt. These alterations were part of the first review of the $3 billion bailout package.

Despite successfully securing a date for general elections, the IMF overlooked certain critical areas that had previously led to the failure of a $6.5 billion bailout package. Additionally, the IMF extended its oversight to the activities of the Special Investment Facilitation Council. Compared to July, the IMF reduced the foreign loan requirements for the fiscal year from $28.4 billion to $25 billion, reflecting a $3.4 billion decrease. The government has already borrowed $6 billion in four months, with expectations of rollovers amounting to $12.5 billion. To meet the remaining needs and secure timely debt rollovers, an additional $6.5 billion effort is required.

Finance Secretary Imdadullah Bosal expressed confidence that the interim government would secure the necessary financing, but challenges arise as the estimated available financing has been reduced by $3.7 billion due to difficulties in obtaining loans through floating Eurobonds and foreign commercial banks.

The IMF disagreed with Pakistan’s projection of a $4 billion to $4.5 billion CAD for the fiscal year, instead estimating a deficit of $5.7 billion, a reduction of approximately $770 million from its previous forecast. Import projections by the finance ministry were also rejected, with the IMF estimating $58.4 billion, a $6.3 billion reduction from its July estimate.

Remittances, exports, and foreign remittance projections were adjusted downwards, contributing to the overall reduction in foreign loan requirements. The decrease in private sector repayments and a rollover of public sector debt by China’s Exim bank were cited as factors behind the $3.4 billion reduction.

With the global markets and foreign commercial banks showing a lack of interest in providing fresh loans to Pakistan, the estimated available financing decreased from $30 billion to $26.6 billion. The IMF’s programme loan receipts were revised from $2.5 billion to $300 million, compensated by an increase in project financing estimates from $4.6 billion to $5.6 billion. In October, loan inflows remained slow at $315 million, bringing the total lending to Pakistan in four months to $6 billion, including funds from the UAE and IMF.

In October, noteworthy receipts for Pakistan included $100 million from Saudi Arabian oil facilities and $102 million from the relatively expensive Naya Pakistan Certificates. Foreign direct investment estimates also rose from $173 million to $700 million. Meanwhile, the International Monetary Fund (IMF) has further revised Pakistan’s economic growth projection to 2%, down from the July estimate of 2.5%. This aligns with projections from the World Bank and the Asian Development Bank.

The IMF also adjusted its inflation rate forecast from 25.9% to 22.8%, potentially creating room for a reduction in interest rates, particularly in the upcoming January monetary policy announcement. The year-on-year inflation forecast for June of the next year has been slightly increased to 16.5% for this fiscal year, surpassing the finance ministry’s range of 20% to 22%, which still exceeds the official target of 21%.

Despite the interim federal finance minister’s assertion that inflation would start decelerating from January, potential increases in electricity and gas prices could challenge these projections. The interbank rupee-dollar parity was 287.85 on November 14, 2023, a strengthening from the rate of 307.4 on September 6 but a weakening from the high of 277 rupees to the dollar on October 30. The strengthening observed from September to October was attributed to a successful crackdown on foreign exchange companies, although some economists argue that the focus shifted from eliminating speculative activity to reducing imported inflation.

Pakistan’s foreign exchange reserves, reaching a low of $4 billion on June 23, saw an increase to $8,727 million by July 14 after the approval of the $3 billion nine-month Stand-By Arrangement (SBA) by the IMF Board. However, reserves have since hovered around $7.5 billion, registering $7,511.5 million on November 3.

The current year’s budget projected 6.35 trillion rupees, with $21 billion in external loans, including $1.5 billion from Eurobonds, $4.6 billion from commercial banks, $2.4 billion from the IMF, and another $2.7 billion from other multilateral parties. Challenges arise in accessing market financing at affordable rates, as international rating agencies, including Moody’s, have not upgraded the country’s rating following the IMF package, impacting the ability to borrow from Eurobonds or commercial banks.

Pakistan will need significant additional financing beyond IMF disbursements to meet debt maturities and support economic recovery. The risk of insufficient financing exists despite assurances provided to the IMF. In summary, the $25 billion, which is more than the $3 billion secured from the IMF, required for debt repayments starting in July 2023, may be inadequate, explaining the lack of a rating upgrade and hindering Pakistan’s capacity to access market financing.

In conclusion, despite optimistic references to a bullish stock market and a contracting current account deficit, the economy still faces challenges. Without debt restructuring, especially in the form of reducing current expenditure, it seems unlikely that Pakistan will meet its dollar repayments to foreign creditors in the immediate term.

While the surface may reflect positive indicators such as a bullish stock market and a shrinking current account deficit, the underlying challenges persist. The IMF’s revisions, coupled with uncertainties in securing market financing at favorable rates, underscore the need for strategic economic measures. The looming question of debt repayments and the potential insufficiency of current financial arrangements highlight the urgency for comprehensive restructuring. Without swift and decisive actions, Pakistan’s capacity to meet its obligations to foreign creditors remains in jeopardy, emphasizing the ongoing complexities within the nation’s economic landscape.