KARACHI: Pakistan is facing difficulties in obtaining approval from the International Monetary Fund’s executive board for a $7 billion loan programme. There are concerns that if the approval is further delayed, it could pose a significant risk for repaying maturing external debt, which may strain the country’s foreign exchange reserves in the long run.
A report from Taurus Securities on Wednesday stated that, given Pakistan’s current external position, the ongoing delay in the EFF approval does not seem alarming, at least for now. For example, Pakistan’s central bank’s foreign exchange reserves stand at $9.4 billion, enough to cover 1.7 months of imports.
Pakistan reached a staff-level agreement with the IMF in July for a new 37-month Extended Fund Facility (EFF), which is crucial for the country’s medium-term external stability. However, the IMF’s approval has been delayed from the originally communicated deadline of August, causing uncertainty in Pakistan’s economy.
The country is facing challenges in rolling over its debt with bilateral lenders and securing $2 billion in financing. Efforts to reach an agreement with commercial banks in the Middle Eastern countries for the $2 billion financing have not materialized, thus causing the delay in IMF programme approval.
Ishaq Dar, the deputy prime minister of Pakistan, accused earlier this week that the IMF was “deliberately delaying” funding disbursement.The report added that Pakistan’s balance of payments has been managed ingeniously, with commercial banks allowed to approve FX payments only to the tune of their respective inflows (ie, FX receipts from export proceeds and remittances, etc). Simultaneously, fiscal and monetary consolidation has curbed aggregate demand, resulting in moderating imports. This has been supported by favourable commodity prices as well.
Remittance inflows have also picked up following administrative measures and a revamp of the exchange companies' operations. The average monthly remittances picked up from $2.2 billion in the first half of the fiscal year 2024 to $2.8 billion in the second half of FY24, and are currently hovering around $3 billion.
Does it mean a workable Plan B is envisaging Pakistan ‘off’ the IMF programme? If not, how long can the country sustain operating without the IMF umbrella?“A significant risk emanating from further delay in the EFF or any strategy aiming to take Pakistan ‘off’ of the IMF program would be the repayment of maturing external debt, which is likely to strain the country’s FX reserves eventually,” the report said.
“To note, the latter still includes deposits from the friendly countries,” it added.“With the IMF programme on hold owing to any delays, the government may find it increasingly challenging to secure the required roll-overs or additional funding from any of the official or private creditors,” it said and added that even raising funds through Eurobonds, etc. may be difficult owing to the surge in Pakistan’s default risk.
Setting aside funds for meeting any approaching debt obligations may require restoration of import prioritization policies by the SBP. Such policies may severely hit industrial production, leading to an increase in unemployment, falling treasury revenues, etc, affecting GDP growth also, according to the report.
“The announcement of any administrative measures on imports/prioritization ofFX payments or any drastic drop in FX reserves owing to debt repayments is likely to put immense pressure on the Rupee, resulting in a resurgence of the grey markets, driving capital flight,” it said.
Foreign investment may also fall with a sell-out in equities and sovereign bonds by foreign investors, along with a slowdown in foreign direct investment.“We are confident of a breakthrough with the IMF and the EFF coming through eventually because that is the only way forward. However, the process of securing a timely approval may get intense as more time passes by,” it said.
“Nevertheless, it is imperative that the government intensifies its efforts to meet the external funding short-fall on a ‘war-footing’ via: i) securing additional rollovers, or fresh loans in the coming days or weeks; ii) financial support from friendly countries; or iii) selling stakes in SOEs including Reko Diq.”