Why a fresh IMF programme is unavoidable for Pakistan

Analysts believe Pakistan will sign up for a fresh loan programme right after the current $7 billion Extended Fund Facility concludes in June.


April 17, 2023

ISLAMABAD – Pakistan is getting closer to signing the staff-level agreement with the International Monetary Fund (IMF), but that doesn’t mean it’s out of the woods yet.

Analysts believe Pakistan will sign up for a fresh IMF loan programme right after the current $7 billion Extended Fund Facility (EFF) concludes in June.

Speaking to Dawn, Topline Securities Head of Research Yousuf M. Farooq said on Friday negotiations for the next IMF programme are likely to begin soon after the elections scheduled for October this year. The main reason for the foregone conclusion is the country’s high external financing needs for the next fiscal year.

The IMF has projected that Islamabad will have gross external financing requirements of $36.6bn in 2023-24. With the estimated current account deficit of $10bn, the IMF’s projection assumes the country will raise as much as $22bn from private creditors next year.

“It looks very difficult for Pakistan to arrange that much financing from private creditors unless it’s under the IMF umbrella. That’s why I believe another IMF programme is unavoidable,” said Mr Farooq.

The fresh programme will also be an EFF, an IMF lending facility designed to provide financial assistance to countries facing serious medium-term balance of payments problems because of structural weaknesses that require time to address.

The ninth review of the current EFF programme was originally scheduled for September 2022. However, the government dillydallied on the implementation of policy actions such as a market-driven exchange rate, higher energy tariffs and new tax measures, bringing the country to the brink of sovereign default.

Mr Farooq said it is difficult to estimate the size of the next IMF loan programme, which will be the country’s 24th since 1958.

The country faces dollar-denominated loan repayments of $73bn in the next three years amid depleting foreign exchange reserves. Pakistan doubled its external borrowings in the last seven years. They increased from $65bn in 2014-15 (24 per cent of GDP) to $130bn (40pc of GDP) in 2021-22.

Of the total external public debt of $99bn, multilateral debt — owed to international financial institutions — accounted for 42pc. The share of bilateral debt — mainly country-to-country loans — is approximately 38pc, according to data compiled by Topline Securities.

The largest share within the latter category is of China ($23bn). By including the loans of $6.7bn obtained from Chinese banks, the biggest Asian economy emerges as Pakistan’s largest bilateral creditor.

Mr Farooq said Pakistan “desperately needs” a debt re-profiling, which means pushing forward the debt maturity dates. A restructuring of the debt, in his view, is unlikely given that most multi- and bilateral loans are already on concessionary terms.

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