FeaturedNationalVOLUME 18 ISSUE # 34

Persistent risks remain despite IMF bailout

Pakistan recently managed to secure a last-minute bailout from the International Monetary Fund (IMF), averting a default in the short term. However, the country’s economy continues to face serious risks, raising doubts among experts and international financial institutions about its ability to implement lasting reforms.

Despite securing the bailout, Pakistan still faces persistent risks. Experts and international financial institutions remain skeptical about the country’s ability to achieve lasting economic reforms based on the track record of previous political governments. While Pakistan is expected to avoid default this year, according to a report by Bloomberg Economics, the risks and challenges for the economy do not end there. Ankur Shukla, a South Asia analyst at Bloomberg, stated that even with the IMF bailout, Pakistan will likely require additional assistance from the IMF in 2024.

The new Stand-By Arrangement (SBA) with the IMF builds upon the government’s efforts under the 2019 Extended Fund Facility (EFF) program, which expired in June, as stated by Nathan Porter, IMF Mission Chief to Pakistan. The funding from the IMF is anticipated to be disbursed in installments to ensure Pakistan’s progress in fiscal consolidation and the continued liberalization of the rupee’s exchange rate. Bloomberg suggests that the IMF is likely to approve the funding due to Pakistan’s recent efforts to meet the IMF’s demands, such as implementing tax increases, budgetary spending cuts, and raising interest rates.

Moreover, the IMF funding will unlock an additional $3 billion in loans pledged by Saudi Arabia and the UAE, enabling Pakistan to meet its debt obligations until April 2024, assuming the current account deficit remains below $4 billion as projected by the central bank. However, the projected dollar funds of around $9.5 billion resulting from IMF and friendly nation inflows will still be insufficient to repay the $8.7 billion in loans (net of rollovers) in the upcoming fiscal year, along with the country’s import bills. This implies that the future government, to be determined in the October elections, will need to negotiate a new agreement with the IMF.

The report emphasizes that the next government must adhere to the measures agreed upon with the IMF to secure another programme in the following year. It concludes by stating that the expected aid should stabilize the economy and boost growth, projecting a GDP growth rate of 2.5% for the fiscal year starting in July, compared to 0.3% in the previous fiscal year.

Despite the IMF bailout, credit rating agencies Fitch Ratings and Moody’s Investors Service warned of ongoing threats to Pakistan’s financial sustainability. The $3 billion lifeline from the IMF is expected to provide necessary foreign exchange for imports, help listed companies gradually resume production, and stimulate economic activities. However, the agencies highlight the need for significant additional financing beyond the IMF disbursements to meet Pakistan’s debt maturities and finance an economic recovery, particularly if current account deficits widen again.

Moody’s analyst Grace Lim expresses uncertainty about Pakistan’s ability to secure the full $3 billion IMF financing during the stand-by arrangement programme. Lim also points out that the government’s commitment to ongoing reforms will be tested as elections approach in October 2023. Previous loans secured in August were halted due to Islamabad’s failure to meet specified conditions.

The towering $25 billion debt repayment, which includes principal and interest, is nearly seven times Pakistan’s foreign exchange reserves, as highlighted by Moody’s. Lim warns that Pakistan’s ability to secure loans from other bilateral and multilateral partners in the longer term will be severely constrained until a new IMF programme is agreed upon, a determination that will be made after the elections.

Furthermore, Moody’s analyst Grace Lim raises concerns about Pakistan’s ability to obtain the full $3 billion of IMF financing during the nine-month stand-by arrangement program. The uncertainty lies in whether the Pakistani government will successfully secure the complete amount. Lim adds that the government’s commitment to implementing ongoing reforms will face a crucial test as the country approaches the October 2023 elections.

The magnitude of Pakistan’s debt repayment, amounting to $25 billion, including both principal and interest, is nearly seven times its foreign exchange reserves, as highlighted by Moody’s. This staggering debt burden poses significant challenges to the country’s financial sustainability. Lim warns that until a new IMF programme is agreed upon, Pakistan’s access to loans from other bilateral and multilateral partners over the long term will be severely limited.

The ability of the upcoming government to negotiate a new agreement with the IMF will play a pivotal role in determining Pakistan’s economic trajectory. While the initial IMF bailout provides temporary relief, it will require sustained efforts and strict adherence to reform measures to achieve long-term stability and growth.

The path ahead for Pakistan’s economy remains uncertain, with risks and challenges persisting even after securing the IMF bailout. The government must navigate the complexities of economic reforms, debt management, and fiscal discipline to overcome these hurdles and establish a foundation for sustainable recovery.

It is essential for Pakistan to address the skepticism of experts and international financial institutions by demonstrating a steadfast commitment to implementing reforms and ensuring transparent governance. By doing so, the country can instill confidence among investors, attract foreign direct investment, and pave the way for a more robust and resilient economy.

Ultimately, Pakistan’s future hinges on its ability to overcome these challenges, chart a sustainable economic course, and secure the necessary financial support to address its debt repayment obligations. The coming months and the decisions made by the government will shape Pakistan’s economic recovery and determine its path towards long-term stability and prosperity.

In conclusion, while the IMF bailout provides temporary relief, risks persist for Pakistan’s economy. The country’s ability to navigate these challenges and secure long-term stability depends on its commitment to implementing reforms, managing its debt burden, and ensuring transparent governance. By addressing skepticism, attracting investment, and securing necessary financial support, Pakistan can pave the way for a more resilient and prosperous future. The upcoming months and the decisions made by the government will be crucial in shaping Pakistan’s economic recovery and determining its trajectory towards sustainable growth.