The International Monetary Fund’s (IMF) criticism of Pakistan’s new budget signals that the lender may choose not to pay long-awaited funding before its bailout programme expires at the end of June, according to Bloomberg.
“This would cause a severe dollar shortage in the first half of the fiscal year, which begins in July, and possibly for longer,” Bloomberg economist Ankur Shukla wrote in the report Pakistan Insight.
“It would also raise the prospect of much lower growth, as well as higher inflation and interest rates than we currently anticipate for fiscal 2024.”
The IMF attacked the budget for trying to widen the revenue base sufficiently and for providing a tax amnesty.
The government presently has $4 billion in foreign currency reserves. With at least $900 million in debt that must be repaid this month, reserves would be depleted by June 30 unless IMF assistance is provided.
Pakistan must return an additional $4 billion between July and December, which cannot be rolled over. “With foreign exchange reserves likely to fall below $4 billion at the start of fiscal 2024,” the research concluded.
“Without an IMF programme, the options for new external funding will be extremely limited.”
It stated that talks with the IMF on a new bailout are unlikely to begin until after the October elections. “It will take time to reach an agreement.” The IMF will not make any meaningful help payments under the new scheme until December.”
In the interim, the country will need to conserve dollars by reducing import purchases and maintaining a current account surplus in order to satisfy its obligations.
To avoid a default in the first half of fiscal 2024, it will also need to seek aid from friendly states.
According to the research, if the IMF does not give funding by June 30, Pakistan’s economy will suffer greatly.
Import restrictions will have to be maintained by the government. The State Bank of Pakistan is also expected to boost interest rates above the present level of 21% in order to reduce import demand and conserve foreign exchange reserves.
“Our current base case is that the SBP will likely remain on hold until December (but that assumes IMF assistance arrives by June-end).”
Continued import restrictions and a weaker rupee would result in higher inflation than currently predicted in fiscal 2024.
“At the moment, we expect inflation to average 22%.” Higher financing costs and curbs on raw material imports would further crimp output. Inflationary pressures would dampen demand,” it warned.
According to the research, if the IMF does not provide assistance this month, growth in fiscal 2024 will be substantially lower than the present expectation of 2.5%.
“Higher interest rates will raise the government’s debt servicing costs.” Currently, the government intends to spend half of the fiscal 2024 budget on debt payment.”