Parliament agreed to amend the budget, cutting expenditure and raising taxes, as part of a series of moves to close a yawning deficit. The IMF has yet to comment on the government’s latest measures, which could unlock another $2.7 billion in loans.
The South Asian country has been under acute financial stress since at least spring 2022, when soaring inflation and widespread flooding – estimated to have caused around $30 billion of damage – shook its economy.
Inflation has been persistent, reaching nearly 40 per cent, despite the central bank hiking interest rates to record levels, raising them by 100 basis points on Monday.
Foreign debt has risen sharply to $23 billion, and it will be a challenge for Islamabad to make repayments, including a $1.6 billion installment due in July.
The latest measures turn the tables in Pakistan’s favour after a long impasse, increasing the chances the embattled nation will be able to avoid a sovereign default for now.
Pakistan will “be able to secure the program now,” said Ammar Khan, chief risk officer at Karandaaz Pakistan, an Islamabad-based non-profit that works to increase financial inclusion by helping smaller companies access credit.
“Unless, of course, something else breaks.”
In addition to mounting foreign debt, Pakistan’s dollar stockpile has shrunk by almost 60 per cent in the past 12 months, to $3.5 billion as of mid-June.
“Without the IMF, it would be difficult for Pakistan to avoid a default given their very limited reserves and large external debt service ahead,” said Eng Tat Low, an emerging market sovereign analyst at Columbia Threadneedle Investments in Singapore.
While the weekend’s developments may help Pakistan reach a deal with the IMF, they may also come at a cost to Prime Minister Shehbaz Sharif and his government.
Higher taxes may hurt the administration’s already low approval ratings at a crucial time in the run-up to elections that must be held by October. This may further bolster the popularity of former PM Imran Khan, who has been calling for early polls as he challenges the military’s influence in politics.
Aid has been on hold since November as the IMF and government remained at loggerheads over issues such as the financing gap and taxes. The IMF has asked Pakistan to raise $6 billion in external financing, while Pakistan had lined up $4 billion as of early June.
Still, even if Pakistan succeeds in restarting the IMF loans, they will only provide a temporary respite given the country's large foreign debt and the limited size of the remaining loans. Finance Minister Ishaq Dar has said the new government formed after elections will need to reach an agreement on securing more IMF aid.
“If Pakistan is able to walk this tightrope then it may be able to avoid defaulting before elections, but afterwards a reprofiling of its external obligations will be required,” said Patrick Curran, a senior economist at Tellimer, who visited the nation last week. Pakistan will ultimately “have to rely on the goodwill of bilateral partners”, he added.