IMF 'allows' borrowing from banks to cut circular debt

ISLAMABAD/KARACHI: The International Monetary Fund (IMF) has authorised Pakistan to borrow Rs1.25 trillion ($4.5 billion) from domestic banks to help slash its ballooning circular debt without adding to its public debt stock, according to officials familiar with the matter.

The agreement was reached recently soon after the policy talks concluded between Pakistani authorities and the IMF officials, as Islamabad laid out a six-year roadmap to pare down the Rs2.4 trillion circular debt weighing on its power sector. The IMF’s nod offers the debt-laden government fiscal breathing room by classifying the new borrowing off the public books.

To service the fresh loans, Pakistan will continue levying a Rs3 per kilowatt-hour debt servicing surcharge (DSS) on electricity bills, projected to generate more than Rs300 billion annually, the officials said, asking not to be named because discussions are private.

Under the plan, the government aims to retire Rs1.5 trillion in debt using a mix of bank borrowings and proceeds from the surcharge. Additionally, it expects to save Rs463 billion through recent renegotiations with Independent Power Producers, targeting lower capacity payments and revised tariffs.

The IMF’s flexibility underscores its support for Pakistan’s structural reforms in the energy sector under its current $7 billion Extended Fund Facility. Official said that the government has assured the Fund that better collection practices and operational efficiencies will prevent future debt accumulation.

When contacted, Minister for Power Awais Ahmed Khan Leghari told The News that the government has not yet received a decision, but he is hopeful IMF has granted approval for borrowing from banks.

“I hope the IMF has granted its approval to borrowing from banks, as there was no in-principle violation in what we demanded, nor was there any impact on the debt-to-GDP ratio or any other parameter,” Leghari said.

The Debt Service Surcharge (DSS) will remain unchanged and continue as part of the term sheet whenever finalized with banks. He clarified that the DSS will stay below Rs3 per unit.

Meanwhile, Pakistan posted a current account surplus of $691 million in the eight months of the fiscal year 2025, mainly driven by a significant increase in remittances, the central bank data showed on Monday.The country recorded a deficit of $1.7 billion during the same period last year. However, the country experienced a current account deficit (CAD) for the second consecutive month in February. The deficit narrowed to $12 million in February, down from $399 million in the previous month. In comparison, the current account had a surplus of $71 million in February last year.

Awais Ashraf, the director of research at AKD Securities Limited, explained that the surplus for the July-February period is largely attributed to the rise in remittances, which outweighed increases in deficits for both trade and services, as well as higher repatriation of interest and dividend payments.

“Current account deficit lowers [in February] due to improvement in workers’ remittances and decline in interest and dividend income. Reduced services deficit given higher services exports and a slight decline in services imports also played their role in the improvement in the current account,” Ashraf added.

Pakistan’s remittances from overseas workers surged 33 per cent to $24 billion during July-February FY25. Factors such as efforts to curtail illicit foreign exchange trading, an increase in the number of citizens working abroad, and economic stability supported by the International Monetary Fund (IMF) loan programme have all contributed to this rise in remittances. Furthermore, workers transfer funds more easily through Roshan Digital Accounts (RDA).

Topline Securities, a brokerage house based in Karachi, stated in a client note that finalising the staff-level agreement (SLA) with IMF might take a few weeks, as the government may need to present new budgetary measures for FY26 to the Fund or submit the budget to Parliament earlier to secure IMF board approval before the end of June, in order to bolster foreign exchange reserves and meet IMF-related targets.

“The State Bank governor, in its last briefing, mentioned that some of the foreign exchange inflows are tied with IMF review. The delay in IMF review may have some repercussions on external accounts as well, in our view and the government will have to rely on relatively high-cost commercial borrowings to support/meet reserves targets,” it said.

On the other hand, country’s textile exports increased marginally by 0.44 per cent year-on-year in February 2025, reaching $1.413 billion, up from $1.407 billion a year earlier. However, exports fell by 16.2pc compared to January’s $1.685 billion, signalling a sharp decline after months of steady growth.

After posting double-digit growth trends from August 2024 to December 2024, the growth in textile exports showed signs of stagnation in January 2025, marking the first significant slowdown in recent months.

For the last fiscal year 2023-24, total textile exports stood at $16.65 billion, a modest 0.9pc increase. Now, in July-Feb of the current FY25, its exports climbed 9.3pc to $12.18 billion, up from $11.14 billion a year earlier.

In February, knitwear led the charge with an 8.81pc rise to $365.5 million, followed by readymade garments, up by 7.22pc to $329.1 million, bedwear grew by 2.37pc to $249.6 million, while towel rose 2.99pc to $97.4 million. Cotton cloth exports dropped by 14.3pc to $148.7 million, and cotton yarn down 34.5pc to $51.4 million, according to the Pakistan Bureau of Statistics (PBS).

Food exports tumbled 20.2pc to $560 million, with rice exports down 28.1pc to $289 million primarily driven by the reopening of India’s rice market. However, Basmati rice exports rose 7pc to $88.4 million, while the other rice varieties dropped 37.2pc to $200.6 million. Fruit exports fell by 24.87pc to $26.6 million, and vegetable exports plummeted by 17.3pc to $62.3 million.

Fish and meat exports also declined, falling 2.8pc to $31.3 million and 2.02pc to $44.15 million, respectively. Notably, sugar exports were almost non-existent. Sports goods exports fell 1.1pc to $31.2 million, with footballs down 9.8pc to $18.27 million.

On a positive note, surgical goods and medical instruments jumped 21.1pc to $36.13m, cement exports soared 50.76pc to $19.97m, and chemical/pharmaceutical exports rose 5.6pc to $123.2m.

On the import front, petroleum group imports in February 2025 remained almost unchanged at $1.247 billion compared to the same month last year.

Crude oil imports surged by 18.7pc to $443.3 million, and LPG imports increased by 31.4pc to $83.3 million. However, imports of petroleum products and LNG declined by 4.98pc to $466.75 million and 20.15pc to $253.8 million, respectively.

Machinery imports jumped 22.2pc year-on-year to $773.5 million in February. Textile machinery surged 38.3pc to $20.3 million, power generation machinery soared 114.5pc to $49 million, and agricultural machinery rose 81.5pc to $8 million. Construction and mining machinery climbed 56.6pc to $11.9 million, while electrical machinery imports grew 12.4pc to $301.6 million. Telecom machinery fell 8.4pc to $175 million, with mobile phone imports slipping 17.6pc to $132.6 million.

Transport sector imports soared 50.75pc to $202.45 million in February. Road motor vehicle imports surged 69.5pc year-on-year to $197 million.

CBU imports for buses, trucks, and heavy vehicles rose 11.5pc to $31.2 million, though motor car CBUs slipped 4.15pc to $25.1 million. CKD/SKD imports for heavy vehicles jumped 109pc to $139.3 million, with buses and trucks up 244pc to $42.3 million and motor cars climbing 84pc to $93.3 million.

Motorcycle imports edged up 2.3pc to $3.7 million, while parts and accessories imports rose 22.3pc to $24.12 million.

Also, Pakistan’s large-scale manufacturing (LSM) sector contracted for the third consecutive month, registering a decline of 1.22pc in January 2024 compared to the same month last year.

This downturn highlighted the ongoing challenges facing key industries, as reported by the Pakistan Bureau of Statistics (PBS) on Monday. During the month under review, food, beverages, chemicals, iron and steel products, electrical equipment, paper and board, non-metallic mineral products, sugar and fertilizer showed significantly negative outputs.

During the first seven months (July-Jan) of the current fiscal 2024-25, (LSM) sector contracted by 1.78pc compared to the same period last year. The LSM sector is crucial to Pakistan’s economy, accounting for 69.3pc of the country’s total manufacturing and contributing 8.2pc to the gross domestic product (GDP).

Despite this year-on-year contraction, the sector posted a month-on-month growth of 2.09pc from December 2024. However, manufacturing activity continues to face significant challenges that are impeding broader sectoral growth.

Comparing the January 2025 performance with January 2024, several major industries faced a sharp decline. The iron and steel sector saw a contraction of 11.52pc, food 7.72pc and beverages output shrank by 2.65 percent. Other notable contractions included chemicals, down by 12.5pc; electrical equipment, by 11.4pc; and machinery and equipment, by 20.9pc. Production of footballs, one of Pakistan’s well-known export items, also dipped by 15.9pc. Besides, sugar output squeezed by 16pc and furniture by 66pc over the same month of last year.

The non-metallic mineral products sector saw a decline of 4.4pc, rubber products 1.38pc, paper & board by 3.9pc, and wood products fell by 1.36pc.

Despite the overall contraction, some sectors posted gains on a year-on-year basis. Textiles output surged by 1.72pc, automobiles by 28.76pc, leather products increased by 1.55pc, pharmaceuticals 2.66pc, fabricated metal 1.42pc, and cement by 0.85pc.

Other sectors that reported growth included coke and petroleum products, up by 19.6pc, tobacco by 27.64pc, computer, electronics and optical products by 2.88pc. Garments recorded increase of 15pc, and other transport equipment sector surged by 33.78pc. Cotton yarn output rose by 8.5pc, and cotton cloth production increased by 0.85pc.