GP Short Notes # 696, 11 June 2023
On 10 June, Dawn referring to the World Bank estimates, reported the economic crisis due to a balance-of-payments crisis and political chaos, with 0.4 per cent economic growth projected for 2023 and 2 per cent for the next fiscal year. This is lower than the 3.5 per cent goal the National Economic Council set. Inflation has risen, the PKR has plummeted, and Pakistan cannot afford imports, causing a decline in industrial output.
On 9 June, Pakistan's government released a PKR 14.5 trillion budget, with a half set aside to service PKR 7.3 trillion of debt. Around 950 billion is allocated for development projects, while populist measures include civil service pay increases and a 17.5 per cent increase in state pensions.
On 9 June, Pakistan's Prime Minister Shehbaz Sharif stated he was hopeful that the IMF would resume the stalled USD 6.7 billion bailout program. He said: "The budget needs to satisfy the IMF to secure the release of more bailout money for the cash-strapped Pakistan." Additionally, he stated that the ninth review will be completed soon.
What is the background?
First, the IMF-Pakistan deadlock. Pakistan's economic turmoil has been exacerbated by political instability and devastating flooding, further underscoring the need for external support. An IMF mission visited Islamabad during January-February 2023 to address the financial challenges. However, negotiations did not agree on external financing estimates and specific domestic fiscal measures. The IMF has requested assurances on external finance from Islamabad before moving further with Pakistan to disburse the rescue tranche. The delay in the resumption of the IMF program is "unprecedented" as Pakistan waits for the completion of the ninth review of the bailout. Pakistan has been waiting for the completion of the ninth review of the bailout since November 2022. Talks on the staff-level agreement have stalled due to difficulties in securing the necessary financing assurances.
Second, Pakistan's external debt. A deepening economic crisis has left Pakistan with barely enough dollars to cover imports and struggling to service sky-high levels of foreign debt. The government had been holding the bank's exchange rate artificially high, contributing to the lack of dollars. At the end of last month, the government allowed it to drop, which could help some businesses and push prices up. Businesses and industries across Pakistan have had to slow down or stop work while prices rise.
Third, the threat of default without an IMF bailout. On 9 May, Pakistan's Federal Minister for Power, Khurram Dastgar Khan, highlighted the potential consequences of failing to secure an agreement with the IMF. He emphasized the increased reliance on China if an agreement was not reached, signalling the country's willingness to seek financial assistance from friendly nations.
What does it mean?
First, the urgency vis-à-vis the IMF support. The government has presented a 14.5 trillion PKR (about USD 50.5 billion) budget, of which more than half would be used to pay down the debt of 7.3 trillion rupees. The PKR has fallen into inflation, and the nation can no longer afford imports, which has resulted in a sharp reduction in industrial production.
Second, a cautious IMF and Pakistan's structural problems. Due to Pakistan's high debt service costs, a sizable chunk of tax income is lost to pay interest on the principle, which harms economic development and GDP growth. Pakistan's inability to solve structural issues and produce "inclusive" growth is the cause of its having only enough foreign reserves to cover one month's worth of imports. This debt crisis may result in Hyperinflation, a depreciation of the Pakistani rupee, a halting of imports, the closing of more factories, a rise in unemployment, and political instability.