Islamabad June 19 2023: The International Monetary Fund’s criticism of Pakistan’s latest budget suggests chances are rising that the lender will opt not to deliver long-awaited aid before its bailout program finishes at the end of June, says Bloomberg in its report.
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. 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 criticized the budget for not taking enough steps to broaden the tax base and for including a tax amnesty. We had expected the IMF to focus more on the primary surplus targeted in the budget.
The country’s FX 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 FX reserves likely below $4 billion at the start of fiscal 2024, default seems highly likely.
Without any IMF program, the options for fresh external funding will likely be very limited.
Negotiations with the IMF on any new bailout aren’t likely to start until after elections in October. Reaching an agreement will take time. We can safely assume that any actual aid disbursement from the IMF under a new program 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 default in the first half of fiscal 2024.
The 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 FX reserves.
Bloomberg 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 we currently anticipate. 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. If IMF aid doesn’t come this month, we expect growth to be much weaker in fiscal 2024 than our current forecast of 2.5%. We will review our projections soon.
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.
