An International Monetary Fund (IMF) mission is scheduled to meet Pakistani authorities shortly to discuss the “next phase of engagement” in connection with the ongoing loan programme. Speaking to the media, Esther Perez Ruiz, the Fund’s resident representative for Pakistan, said: “A mission team led by Nathan Porter, IMF’s mission chief to Pakistan, will meet with authorities next week. The aim is to lay the foundation for better governance and stronger, more inclusive and resilient economic growth that will benefit all Pakistanis.”

It is relevant to add here that Pakistan recently completed a short-term $3 billion programme, which narrowly averted a sovereign default risk. But the economy is not yet out of the woods and the government feels the need for a fresh, longer-term programme. Last week, the Fund announced that a mission would visit Pakistan this month to discuss the FY25 budget, policies, and reforms under a potential new programme.

Pakistan’s $350bn economy has stabilized a little after the completion of the last IMF programme, with inflation coming down to around 17 per cent in April from a record high 38pc last May. But the country is still faced with a high fiscal shortfall. No doubt, the external account deficit has been curtailed through import control mechanisms, but this policy has had a negative effect on growth, which is projected to be only around 2pc this year.

A few days ago, the Fund warned that Pakistan is faced with formidable challenges ahead. The IMF in its staff report following the second and final review under the standby agreement said: “Downside risks remain exceptionally high. While the new government has indicated its intention to continue the SBAs (standby arrangement) policies, political uncertainty remains significant.” In the opinion of the IMF, a high cost of living, together with lower external financing, could derail the present policy aimed at achieving debt sustainability and put pressure on the exchange rate. Other potential risks to Pakistan include higher commodity prices, shipping disruptions and tighter global financial conditions which would adversely affect external stability.

A concurrent development is the policy statement by the Asian Development Bank’s Country Director for Pakistan Yong Ye who in an exclusive interview on the sidelines of ADB’s 57th Annual Meeting said that support from the ADB would only be possible with a clean chit from the IMF. Expressing cautious optimism over Pakistan’s economy, Mr Ye termed the IMF agreement as a ‘miracle’ and said that the caretaker government did a good job stabilising the economy under the Fund’s Stand-By Arrangement. More importantly, he added, with the IMF agreement in place, the central bank’s foreign exchange reserves increased from $4.4 billion to over $9bn in the week ending on May 3. But, according to him, the country is still in the ICU, although its immediate liquidity crisis has been eased, and default has been avoided.

The overall situation remains hopeful with the $1bn eurobond payment received this month. The PSX bull run indicates rising market confidence, while other positive indicators like a narrowing external account deficit and recovering remittances have also improved investor confidence. However, fiscal deficit challenges remain, the major reason being the high interest rate and a crushing debt servicing burden

The ADB representative emphasised that the bank’s management wants to be with the government in this difficult time but it wants to ensure that the debt is sustainable rather than an added burden that does not remove the constraints the country is facing. The ADB director’s view is that while the economy is recovering, there is still uncertainty moving forward. The removal of this uncertainty depends very much on the government’s commitment and ability to implement economic and structural reforms which have remained an unfulfilled promise. In this context, he underlined the importance of investment in reviving the economy and the role the Special Investment Facilitation Council (SIFC) could play to this end.

He pointed out that from the ADB’s point of view, while the SIFC may be a quick short-term solution, Pakistan still needs to look for long-term systematic solutions to attract foreign direct investment. This would require an overall enabling environment with improved regulations and transparency. Needless to say, an important element in attracting FDI is the ability of firms to repatriate profit out of the country. At the moment, investors believe that while earning money in Pakistan is possible, repatriating profits is difficult. This impression needs to be dispelled.

Above all is the prime need for reforms, especially cutting the swollen expenditure budget and administrative overruns which consume whatever new revenues are generated. Another requirement is to divert investment from the real estate sector to natural resources where value is added. Inflation is on a downward trend, and if this trend continues, the monetary policy rate will come down, resulting in a smaller burden of debt servicing and more fiscal room.