Negotiations with IMF on any new bailout aren’t likely to start until after elections in October.
KARACHI: The International Monetary Fund’s (IMF) criticism of Pakistan’s latest budget suggests chances are rising that the lender will opt not to deliver long-awaited aid before its bailout programme finishes at the end of June, Bloomberg reported.
“This would cause a severe dollar shortage in the first half of the fiscal year that starts in July, and possibly for longer — significantly raising the odds of default, Bloomberg economist Ankur Shukla said in the report, Pakistan Insight.
“It would also raise the prospect of much lower growth, and higher inflation and interest rates than we currently anticipate in fiscal 2024.”
The IMF criticised the budget for not taking enough steps to broaden the tax base and for including a tax amnesty.
The country’s foreign currency reserves currently stand at $4 billion. With at least around $900 million in debt that must be repaid this month, the reserves will fall by June-end unless the IMF aid comes.
Between July-December, Pakistan must repay an additional $4 billion, which cannot be rolled over. “With foreign exchange reserves likely below $4 billion at the start of fiscal 2024, the default seems highly likely,” the report said.
“Without any IMF programme, the options for fresh external funding will likely be very limited.”
It said that negotiations with the IMF on any new bailout aren’t likely to start until after elections in October. “Reaching an agreement will take time. Any actual aid disbursement from the IMF under a new programme will not happen until December.”
In the meantime, the country will need to conserve dollars by limiting import purchases — and keeping a current account balance in surplus— to have any hope of being able to meet its obligations.
It will also need to seek assistance from friendly nations to avert a default in the first half of fiscal 2024.
The report said Pakistan’s economy will likely be hit hard if the IMF doesn’t deliver aid by June-end.
The authorities will have to keep import restrictions in place. The State Bank of Pakistan will also likely raise rates above the current level of 21% to further curb demand for imports and conserve foreign exchange reserves, it added.
“Our base case currently is that the SBP will likely remain on hold through December (but that assumed the IMF aid coming in by June-end).”
Continued import restrictions and a weaker rupee would lead to higher inflation in fiscal 2024 than currently anticipated.
“We currently expect inflation to average 22%. Higher borrowing costs and restrictions on imports of raw materials would hit production further. Higher inflation would damp consumption,” it added.
The report said if IMF aid doesn’t come this month, the growth will be much weaker in fiscal 2024 than the current forecast of 2.5%.
“Higher rates will also increase the government’s debt servicing costs. The government currently plans to spend half of the fiscal 2024 budget on debt servicing.”
Chinese companies have been invited by Sindh Chief Minister Syed Murad Ali Shah to visit Karachi and other regions of Sindh Province in order to observe the quickly growing businesses and investigate prospects in fields like clean energy, infrastructure development, and public transit projects.
Speaking in Beijing to a delegation headed by the chairman of NORINCO International Co., Ltd., he stated that all facilities required would be provided by the governments of Sindh Province and Pakistan.
With assistance from NORINCO International, the Sindh Chief Minister stated that the Provincial Government will firmly urge North Vehicle and BeiBen to think about setting up a Vehicle Assembly Plant in the Dhabeji Special Economic Zone.
In order to strengthen collaboration in the fight against money laundering, terrorist financing, and associated crimes, the Saudi Press Agency announced this week that the Saudi cabinet, led by Crown Prince Mohammed bin Salman, had approved a memorandum of understanding (MoU) with Pakistan’s Financial Monitoring Unit (FMU).
Due to its severe money laundering and terrorism funding issues in recent years, Pakistan was added to the Financial Action Task Force’s (FATF) grey list in June 2018.
The nation was taken off the gray list in October 2022 after enacting extensive measures to fortify its financial system.
The FMU is Pakistan’s financial intelligence unit, created under the Anti-Money Laundering Act of 2010 and tasked with collaborating with foreign partners and evaluating reports of suspicious transactions.
According to the SPA, “the cabinet approved a memorandum of understanding regarding cooperation in exchanging investigations related to money laundering, terrorist financing, and related crimes between the Financial Monitoring Unit in the Islamic Republic of Pakistan and the General Department of Financial Investigation at the Presidency of State Security in the Kingdom of Saudi Arabia.”
The MoU is an indication of Saudi Arabia and Pakistan’s growing strategic partnership. A significant Pakistani diaspora resides in the Kingdom, and numerous Pakistani businesses have established a presence there.
Saudi Arabia has been a key supporter of Pakistan’s economy, bolstering its reserves with substantial deposits in the State Bank of Pakistan and offering deferred oil payment facilities.