FeaturedNationalVOLUME 19 ISSUE # 10

Persistent Risks

The International Monetary Fund has declared that Pakistan’s economy is now stable. However, it has cautioned that Islamabad faces serious risks related to debt sustainability and the repayment of loans. It acknowledged the caretaker government’s efforts in maintaining economic stability through decisive policy measures, crediting them for their steadfast implementation.

It emphasized that the caretaker government has exceeded its constitutional period of 90 days, initially causing controversy. The Election Commission of Pakistan justified the extension, citing the need to redraw constituency boundaries following the decision to base elections on the new 2023 Census. While the caretaker government’s achievements in stabilizing the economy are recognized, the IMF highlighted persistent medium-term challenges. The report emphasized the need for ongoing policy efforts to address these challenges sustainably. Governance and transparency risks from the new Sovereign Wealth Fund and the Special Investment Facilitation Council were also pointed out.

The IMF raised concerns about elevated gross financing needs, posing significant risks to debt sustainability, especially with depleted fiscal and reserve buffers. Timely disbursements of committed bilateral and multilateral support were deemed crucial. The report highlighted the high risk of gross financing needs materialization, given the significant sovereign exposure of domestic banks and limited policy flexibility.

Sovereign stress risks were identified due to high vulnerability stemming from elevated debt and gross financing needs, coupled with low reserve buffers. Medium-term risks to debt sustainability, such as uneven program implementation, political risks, and access to sufficient financing, were considered high.

The IMF warned that policy slippages, insufficient financing, or increased gross financing needs could undermine the path to debt sustainability. With low foreign exchange reserves and limited market financing, foreign payments were projected to remain a persistent challenge. Delays in the disbursement of planned financing from international financial institutions or bilateral partners were highlighted as major risks, given the limited buffers. Higher commodity prices and tighter global financial conditions, including geopolitical conflicts, can exert pressure on the exchange rate and external stability.

Political tensions leading up to the upcoming elections were identified as potential factors influencing policy decisions and reform implementation. The IMF also noted substantial public sector external rollover needs, a persistent current account deficit, challenges in the external environment for Eurobond and Sukuk issuance, and limited reserve buffers in case of delays to expected inflows. The IMF’s total lending to Pakistan was stated to be nearly $8 billion, expected to increase to $9 billion by March of the current year.

Recently, caretaker Finance Minister Dr. Shamshad Akhtar projected a rebound in the country’s economic growth by 2-2.5% in the current fiscal year. She estimated a 5.6% growth in the agriculture sector and a 2.5% growth in the industrial sector for the year. She is also optimism about revenue collection as the Federal Board of Revenue (FBR) is likely to collect Rs10 trillion in FY24, surpassing the set target of Rs9.4 trillion. She highlighted the growth of the country’s foreign exchange reserves, reaching a recent high of $9.1 billion from $4 billion at the beginning of her term. Regarding monetary policy, she mentioned that the State Bank of Pakistan (SBP) recognizes the need to lower the benchmark policy rate, currently at a record high of 22%, to support economic activities. However, the decision to cut rates depends on a deceleration in the inflation rate, which has spiked recently. The minister pointed out that the cut-off yields on Treasury bills have fallen below the central bank policy rate, indicating a potential interest rate cut.

The minister acknowledged the upward trend at the Pakistan Stock Exchange (PSX) since the beginning of the current fiscal year. The PSX provided a 55% return in 2023, with the benchmark KSE 100 Index closing at over 62,450 points in December 2023.

However, the International Monetary Fund (IMF) has voiced apprehensions regarding the creation of Pakistan’s new Sovereign Wealth Fund (SWF), citing potential governance risks. Established in August 2023, the SWF, which comprises seven profitable State-Owned Enterprises (SOEs) valued at $8 billion, presents challenges in terms of governance and public financial management. The IMF highlights exemptions granted to these SOEs from the best practice structure outlined in the SOE Act, raising concerns about corporate governance, monitoring, transparency, and accountability. While the interim government assures the IMF of addressing these concerns, the spotlight remains on the governance landscape surrounding the SWF.

In conclusion, the IMF’s cautionary stance on governance risks in Pakistan’s new Sovereign Wealth Fund adds a layer of complexity to the economic landscape. As the interim government pledges measures to address these concerns, the nation’s economic trajectory remains a focal point. Additionally, the optimism expressed by Caretaker Finance Minister Dr. Shamshad Akhtar regarding economic growth, revenue collection, and monetary policy provides a nuanced backdrop to the challenges and opportunities that lie ahead for Pakistan’s financial landscape.