As per recent media agencies, Pakistan makes formal request to IMF for a next bailout package of between US$6 billion – US$8 billion and are seeking possibility of augmentation via climate financing. The country has also requested to dispatch IMF review mission next month to shore up the details of next bailout package for time horizon of 3 years as per Extended Fund Facility (EFF).
While Pakistan makes formal request to IMF for bailout, exact size and timeframe of the new package is expected to be ascertained after evolving consensus on major contours of upcoming programme in May 2024 month. This comes amid after reports suggesting that a high-level Pakistani delegation has plans to visiting Washington. This will be for attending annual spring meetings of IMF/World Bank.
What is going on with Pakistan economy?
Since Pakistan makes formal request to IMF for bailout, let us have a closer look about the country’s economic situation.
In 2023, Pakistan recorded new lows. Pakistani rupee touched an all-time low, surpassing PKR 300 mark against the USD in August 2023 month. Foreign reserves of the country with State Bank of Pakistan (SPB) saw a significant drop — at ~$3.1 billion in January 2023 month.
Cash-deficit Pakistan struggled to unlock financing from IMF. To secure this, SBP (State Bank of Pakistan) increased interest rate by ~300 basis points to touch ~20%. This was the highest level since October 1996 month. Pakistan introduced taxes post increasing its gas and electricity prices.
Pakistan Consumer Price Index (CPI) growth touched all-time high of ~38.0% YoY in May 2023. In simple language, the inflation increased so much that a litre of milk was priced at more than INR 200 in Pakistan.
Crisis seen in Pakistan’s political arena also added to country’s woes. In May 2023, a key political leader — Imran Khan, was arrested. This arrest was made on the charges of corruption and selling gifts from foreign dignitaries in an unlawful manner. He was also accused to leaking state secrets.
As a result of result, significant protests and violence was seen in Islamabad.
Numerous terror and suicide bombing events were reported in Pakistan. Minimum of 271 militant attacks took place in the country during 1H23. Collectively, this led to a loss of ~389 lives and injured ~656 individuals.
In August 2023, Pakistan President Arif Alvi decided to dissolve National Assembly after the advice from PM Shehbaz Sharif’s advice. This marked end to government’s tenure, paving way for upcoming general elections. After this, caretaker government decided to take charge.
Pakistan makes formal request to IMF for bailout: But why?
In August 2023, Pakistan President Arif Alvi decided to dissolve National Assembly after the advice from PM Shehbaz Sharif’s advice. This marked end to government’s tenure, paving way for upcoming general elections. After this, caretaker government decided to take charge.
Pakistani authorities continue to paint a rosy and fancy picture of the economy. IMF in Regional Economic Outlook released by Middle East and Central Asia highlighted that Pakistan external buffers deteriorated. This was mainly because of ongoing debt service, which includes Eurobond repayments.
After seeing contractions in 2023, growth in Pakistan should be able to rebound to ~2% in 2024. This is being helped by positive base effects in agriculture and textile sectors.
Current USD 3 billion arrangement of Pakistan with IMF is expected to run out in late April. Government plans to seek longer and bigger loan which can help in bringing stability macroeconomic condition. Apart from this, the country plans to execute its structural reforms.
Can Pakistan saw some recovery in 2024?
While Pakistan makes formal request to IMF for bailout, experts are still trying to figure out whether or not Pakistan will recover in 2024.
First of all, Pakistan is required to address its human capital crisis. This is because ~7% of children in Pakistan die before 5th birthday. This data is multiple times higher against comparable countries. Experts believe that ~40% of children under the age of 5 tend to suffer from stunted growth.
Secondly, to fund its improvements related to service delivery and human capital development, it should generate more fiscal space. The country’s tax collection remained at low ~10% of GDP for decades. They need to abolish expensive tax exemptions and decrease compliance costs.
Next, the country should strive for more dynamic and open economy. Its present policies negatively impacts the market for benefit of few. This prevents productivity growth. Finally, agriculture sector should be transformed to guard food security amidst climate change and increasing water scarcity.
The local governments are required to be empowered with capacity to increase and efficiently distribute financing to invest in local services. Therefore, decentralization is required to be revived.