Pakistan’s fragile capacity to meet its external debt commitments has been starkly highlighted by the IMF, as it evaluates Islamabad’s expanding external financing requirements, projected to escalate to $62.6 billion within the span of three years under the Extended Fund Facility (EFF).

Stretching this outlook to a five-year horizon, spanning from 2024-25 through 2028-29, the financial gap could swell further, touching a formidable $110.5 billion. The IMF staff report reveals that Pakistan’s external financing demands will reach $18.813 billion in the current fiscal year alone, climb to $20.088 billion in 2025-26, and surge to $23.714 billion by 2026-27.

Crucially, the report signals no significant decline in these external obligations, even beyond the three-year program’s completion. For instance, financing needs are projected to hit $24.625 billion in 2027-28 and slightly ease to $23.235 billion in 2028-29. The IMF issued a stark warning, noting that Pakistan’s ability to fulfill these financial obligations hinges precariously on various significant risks. The country’s capacity to repay remains deeply reliant on consistent policy adherence and timely external financial inflows. By September 2024, the IMF’s exposure to Pakistan will reach Special Drawing Rights (SDR) 6,816 million, equivalent to 336% of Pakistan’s quota under the Fund, with the potential to expand further.

Upon completing all financial arrangements, the IMF’s exposure is projected to peak in September 2027, reaching SDR 8,774 million—approximately 432% of the nation’s quota and roughly 55% of the anticipated gross reserves for fiscal year 2027. This figure is almost double the average exposure observed in recent EFF programs.

The IMF further underscored the perilously high risks Pakistan faces—ranging from elevated public debt and substantial gross financing requirements to meager foreign reserves and mounting sociopolitical instability. These factors collectively jeopardize the country’s capacity to implement policies effectively, which could severely undermine its repayment capacity and debt sustainability.

Restoring both fiscal and external stability remains imperative if Pakistan is to sustain its ability to honor its obligations to the IMF. This will necessitate robust, sustained policy implementation—chiefly fiscal consolidation and the buildup of external assets—alongside transformative reforms aimed at fostering resilient and durable economic growth.

In terms of external financing, the IMF projects that multilateral disbursements will total $14 billion over the period from FY25 to FY28, with key contributors including the World Bank ($7.1 billion) and the Asian Development Bank ($5.6 billion). Bilateral creditors are expected to maintain their commitments through continued financing activities. Additionally, Pakistan is expected to have modest access to short-term commercial bank borrowing through FY25-FY26, with a gradual return to international bond markets anticipated by mid-FY27 as policy credibility is restored.

The IMF-backed program is fully funded, with solid commitments for the first year and promising prospects beyond that. For FY25, $16.8 billion will come from rolling over existing short-term financing, and an additional $2.5 billion is pledged from China, Saudi Arabia, ADB, and IsDB. Pakistani authorities have secured firm commitments from key bilateral partners to maintain their current exposure levels throughout the program, including rolling over existing short-term liabilities, which will help meet financing needs for the remaining period.

Foreign commercial banks have agreed to renew loans totaling $6.6 billion, which were previously renewed during the 2019 EFF and 2023 SBA, and are expected to continue under the new program. These commitments, along with support from multilateral institutions, provide the necessary financial assurances. However, financing risks remain high, and continuous monitoring will be essential to ensure timely and adequate financing during program reviews.

Reports indicate that the government has secured $1.2 billion under the Saudi Oil Facility and $430 million from the Islamic Development Bank through its International Islamic Trade Finance Corporation, primarily to boost trade among OIC countries. The bulk, if not all, of the $1.63 billion is expected to be allocated for fuel imports, which amounted to $2.8 billion for July-August 2024, according to the State Bank of Pakistan. For FY 2023-24, imports of mineral fuels, oil, and their distillation products totaled a staggering $28 billion. This was despite the government’s efforts to reduce furnace oil imports, leading to power outages, and petroleum products, as domestic demand plummeted due to high inflation driven by rising international oil prices and heavy domestic taxation. The reliance on petroleum levies as a revenue source increased to support the worsening balance of payments (BoP) position.

In the current geopolitical climate, there is a real risk of oil prices rising even further if Israel and the US retaliate against Iran for its October 1 missile attack. Iran has warned that any attack would be met with counter-retaliation, potentially disrupting the global supply chain.

It’s worth noting that the $1.2 billion from the Saudi Oil Facility and $430 million from the Islamic Development Bank are likely to be on concessional terms. On the other hand, the government has secured a pledge for $1 billion from Dubai International Bank (DIB), which will be on market terms. This means the interest rate will depend on the prevailing rates and Pakistan’s risk of default as determined by international rating agencies. While Moody’s and Fitch recently upgraded Pakistan’s rating, they still consider the country to be at high risk of default. Consequently, commercial loans are expected to come with high interest rates, potentially as high as 11%, according to some economists.

Reports, though unconfirmed by the government, suggest that the issuance of sukuk/Eurobonds, budgeted at $1 billion for the year, is unlikely due to the high cost of borrowing. There’s also no confirmation that Mashreq Bank will extend any loans to Pakistan, despite talks reportedly taking place in August. The exact interest rate factored into the budget remains unclear, making it difficult to estimate how much servicing payments might increase and how this will impact the deficit and inflation.

What’s clear is that the government is struggling to secure the external financing it needs. So far, there is a $4 billion shortfall—$3 billion from commercial banks and $1 billion from debt equity. The government had budgeted $20.4 billion from external sources, approved by the IMF, with $4 billion expected from commercial banks, but only $1 billion has been secured so far. While the IMF made securing these funds a prerequisite for loan approval, one might assume that with the Board’s approval, commercial banks might be more willing to lend to the government. However, the rates offered are unlikely to be more favorable.

The only way to mitigate the pressure of securing external loans at high rates is through voluntary sacrifices from current expenditure recipients. The government claims to be committed to this, but concrete action is yet to be seen.