IMF Critique Raises Concerns: Funding Release in Doubt as Pakistan’s Budget Faces Scrutiny!
In a report by Ankur Shukla, South Asia Economist at Bloomberg Economics, Pakistan’s economy faces significant challenges if the IMF fails to provide aid by the end of June.
Shukla highlights that the prolonged suspension of the IMF bailout, stagnant since November, could result in a severe dollar shortage in the initial months of the upcoming fiscal year, potentially increasing the likelihood of default.
The absence of IMF support may extend the shortage, leading to prolonged economic instability with the prospect of lower growth, heightened inflation, and increased interest rates in fiscal 2024, warns Shukla.
With repayments of an additional $4 billion between July and December, coupled with dwindling FX reserves expected to be below $4 billion at the start of fiscal 2024, the risk of default looms large, according to Bloomberg Economics.
The concerns arise following the IMF’s dissatisfaction with Finance Minister Ishaq Dar’s budget proposals for fiscal year 2023-24. The IMF criticized the missed opportunity to broaden the tax base and expressed disapproval of the new amnesty scheme, deeming it a damaging precedent.
Shukla notes that the IMF’s focus on the primary surplus targeted in the budget was anticipated, and the absence of aid by June-end could result in a significant decline in reserves, given the $900 million debt repayment due this month.
As negotiations for a new bailout with the IMF are unlikely to commence until after October elections, Shukla projects that any aid disbursement won’t occur until December. In the interim, Pakistan may need to restrict imports, maintain a current account surplus, and seek assistance from friendly nations to avert default in the first half of fiscal 2024.
Without IMF aid, external funding options for Pakistan would likely be limited, posing further economic challenges. Shukla emphasizes the need for import restrictions, potential rate hikes by the State Bank of Pakistan, and efforts to conserve foreign exchange reserves to navigate the economic turbulence.
Shukla predicts that the absence of aid by June-end could lead to higher inflation, weaker growth than forecasted, increased government debt servicing costs, and heightened economic difficulties for Pakistan in fiscal 2024.
The government’s allocation of nearly half of its fiscal 2024 funds to debt servicing underscores the critical importance of resuming the IMF bailout program for Pakistan’s cash-strapped economy, which currently grapples with dwindling foreign exchange reserves at billion.
As of the latest update, Pakistan is not listed on the Executive Board calendar until June 29, emphasizing the urgency for a swift resolution to secure vital financial support.