The political instability that has overtaken Pakistan ever since former Prime Minister Imran Khan was detained earlier this week would make it more challenging to get a financial lifeline from the IMF and will worsen the economic situation there. .Both growth and inflation have slowed in the 220 million-person nation of South Asia during the previous year. Due to the significant depreciation of the rupee and the country’s declining foreign exchange reserves, Pakistan has had difficulty importing basic goods like food, which has resulted in tragic stampedes at distribution sites. There has been concern about Pakistan’s potential debt default for months.
On May 10, 2023, in Lahore, following demonstrations by Pakistan Tehreek-e-Insaf (PTI) party members and backers of former Pakistani Prime Minister Imran Khan, motorists pass burned-out automobiles in front of Zaman Park.
In response to Imran Khan’s detention, protesters are now targeting Pakistan’s military. Here are the essential details.
Following Khan’s spectacular arrest on corruption accusations, countrywide protests and violent riots have erupted across the nation, posing a threat to the nation’s capacity to maintain peace. Help with finances that is desperately needed has been further questioned. Khan was granted bail on Friday but admitted that he anticipated being detained once more. According to Sergi Lanau, head of emerging market strategy at Oxford Economics, “it makes things quite complicated.” “In a situation that was already very difficult, this is very bad news.”Thanks to the patience of foreign creditors like China, the government may probably get by for the foreseeable future; nonetheless, the possibility of default will increase unless an IMF agreement can be quickly obtained.
A representative for the International Monetary Fund said Thursday that negotiators are “heavily engaged” with Pakistani authorities, who “face a very challenging situation.” The IMF has been in discussions with Pakistan’s government about reviving a $6.5 billion assistance program.
Investors, though, are dubious With the political climate being unstable and elections in the autumn, Pakistan and the IMF can come to an agreement to release much-needed funding.
Pakistan’s financial collapse
Pakistan’s political unrest coincides with a bleak economic future for the nation.Growth has slowed to a crawl, and imports are being severely hampered by a severe dollar shortage. Prices are soaring as a result of food shortages. The cost of food increased by more than 52% in rural areas and by over 47% in urban areas in April, bringing inflation to an annual rate of 36.4%.
People in Islamabad queue up outside a flour distribution facility to get free flour donations from the government.
Many people in Pakistan are going hungry during Ramadan due to severe economic situation.
According to Tahir Abbas, director of research at Arif Habib, the central bank’s about $4.4 billion in foreign exchange reserves is adequate to finance imports for about a month. In a nation still recovering from terrible flooding last year, a “balance of payments” issue is degrading living standards. It may “reverse the poverty gains achieved in the last two decades and further reduce the incomes of already poor households,” the World Bank said last month.
Pakistan’s capacity to continue making its debt payments has also been questioned. Observing that the nation’s foreign currency reserves were “far lower than necessary to cover its imports needs and external debt obligations over the immediate and medium term,” rating agency Moody’s lowered the country’s credit rating in late February. Widespread demonstrations can make the suffering worse. Authorities attempted to calm the mayhem this week by blocking mobile internet access, a move that the GSMA, a trade association for mobile network providers, denounced as detrimental to the public and companies.
“The political uncertainty and crisis-like situation, including [protests] are dampening the already ailing economy,” Abbas added.
What could happen next?
The government has been collaborating with the IMF to restart a funding package that has been on hold since November and is set to expire in June. Director of communications at the IMF, Julie Kozak, stated on Thursday that the nation has “very large financing needs.”
To support the government’s policy initiatives, Kozak stated, “the financing already committed by Pakistan’s external partners is welcome, but significant additional financing is essential.”
Investors believe it is doubtful that the IMF’s required measures to strengthen the country’s fiscal situation would be accepted, however, since they would likely result in immediate economic suffering given the impending elections and the growing popular resentment. This week, the rupee touched a record low against the US dollar of roughly 300. In contrast, Pakistani government bonds have exhibited distressed pricing.
It’s not at all simple to reduce expenditure and raise taxes, according to Lanau. These are issues that no one can stomach in the lead-up to an election.
At PGIM Fixed Income, which holds Pakistani bonds, chief Asia economist Gerwin Bell stated that the company’s “long-standing” belief is that “the government would not be able to provide needed assurances to the IMF. “The present political circumstances, Bell continued, “only support our position.”
In a televised speech on Friday, Prime Minister Shehbaz Sharif said that his predecessor was to blame for the nation’s economic woes.
“As you know, the currency is navigating through difficult times,” he remarked. The difficulties we overcame have made the situation even worse. He went on to say, “The prior we’re working to fix the government’s breach of an agreement with the IMF’’.
The likelihood that Pakistan might default on its debt increases without assistance from the IMF, which is considered as necessary to unlock finance from other sources. However, there’s still a possibility that the nation can avert that situation.
Bell stated, “We do not believe the danger of default is extremely substantial. He continued, pointing out that the “private sector bond debt is very small, and large bilateral creditors have so far been willing to roll over maturities,” noting that China and the Gulf economies “are not eager to trigger defaults. “However, the danger can linger for some periods throughout the nation. While the nation “can manage” through July and maybe into August, according to Abbas, To tackle the external sector problem, “it will be absolutely essential to restart the IMF program or launch a larger IMF program.
“According to Moody’s, Pakistan would require between $35 billion and $36 billion in external funding for its fiscal year 2024, which begins in July and ends in June of the following year.
Approximately 50% of government revenue will need to go toward debt interest payments “for the next few years,” according to the ratings agency, which would exacerbate economic problems and fuel political unrest.
In its study, Moody’s stated that “a significant portion of revenue going toward interest payments will increasingly constrain the government’s ability to service its debt while also meeting the population’s basic social spending needs.”