Pakistan's failure to seal deal with IMF to increase risk of default: Bloomberg
Pakistan
Without an IMF programme, the options for securing fresh external funding will be severely limited.
ISLAMABAD (Web Desk) - Pakistan's failure to seal a deal with the International Monetary Fund (IMF) would significantly increase the likelihood of default, Bloomberg reported.
The IMF criticized the Pakistan's budget for its insufficient measures to broaden the tax base and its inclusion of a tax amnesty.
The current foreign exchange (FX) reserves stand at $4 billion, but approximately $900 million needs to be paid this month, causing the reserves to decline by the end of June unless IMF aid is received.
Pakistan is also faced with the challenge of repaying an additional $4 billion between July and December, which cannot be rolled over.
If the FX reserves remain below $4 billion at the start of fiscal year 2024, the likelihood of default becomes highly probable.
Without an IMF programme, the options for securing fresh external funding will be severely limited.
However, negotiations for a new bailout with the IMF are not expected to commence until after the elections in October, and reaching an agreement will take time.
Consequently, it can be assumed that any actual disbursement of aid under a new program from the IMF will not occur until December.
In the interim, Pakistan will need to conserve dollars by restricting import purchases, maintain a surplus in the current account balance, and seek assistance from friendly nations to avoid default in the first half of fiscal year 2024.
Bloomberg also highlighted that if the IMF fails to provide aid by the end of June, the economy of Pakistan will likely suffer significant consequences.
Import restrictions will need to be maintained, and the State Bank of Pakistan (SBP) is expected to raise interest rates above the current level of 21%.
The base case scenario assumes that the SBP will remain on hold until December, but this is based on the assumption that IMF aid will arrive by the end of June.
Continued import restrictions and a depreciated rupee would lead to higher inflation in fiscal year 2024 compared to current estimates, with an anticipated average inflation rate of 22%.
Higher borrowing costs and restrictions on raw material imports would further impact production, while increased inflation would dampen consumption.
If the expected IMF aid does not materialize this month, growth in fiscal year 2024 is expected to be much weaker than the current forecast of 2.5%.
Consequently, the projections for the country's economic outlook will need to be reviewed.
Furthermore, higher interest rates would increase the government's debt servicing costs, with the current plan allocating half of the fiscal year 2024 budget to debt servicing.
