New Delhi: As Pakistan faces a crippling debt crisis, its staff-level agreement with the International Monetary Fund (IMF) for $3 billion funding over nine months through a stand-by arrangement (SBA) has offered a ray of hope. However, questions remain on whether the anticipated bailout will be enough to address the country’s severe balance-of-payment issues.
The IMF executive board is scheduled to meet on 12 July to decide on the SBA, including a $1 billion tranche to be released almost immediately, according to a report in the News International, a leading Pakistani English-language newspaper.
If the board approves the SBA, it would be the twenty-third time that Pakistan has taken funding from the IMF since 1958, and the fourteenth IMF bailout since 1988. Pakistan has so far required an SBA 12 times since 1958, underscoring its persistent balance of payments issues.
“Pakistan would become the fourth-largest borrower from the IMF after the SBA is approved. It has a history of approaching the IMF for bailouts, but the question is how would it utilise the new bailout, given its track record?” said Sriparna Pathak, an associate professor of China Studies at O.P. Jindal Global University in Sonipat, Haryana.
Pathak told ThePrint that the true scope of Pakistan’s external debt is not known and is often underestimated due to loans obtained from sources that are not reflected in the account books— including organisations such as the Chinese government’s State Administration of Foreign Exchange (SAFE).
As of 31 March 2023, the total external debt and liabilities of Pakistan stood at $125.72 billion, according to the country’s central bank, the State Bank of Pakistan (SBP). The total liquid foreign exchange reserves as of the weekend ending 30 June stood at $9.745 billion, shows SBP data.
The federal finance minister of Pakistan, Ishaq Dar, on 4 July had stated that he is hopeful that Pakistan’s total foreign exchange reserves would cross $14 billion by the end of the month, with $1.1 billion expected to be released by the IMF, $2 billion from Saudi Arabia, and $1 billion from the United Arab Emirates (UAE), reported the Pakistani newspaper Minute Mirror.
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Pakistan’s economy: High hopes, nebulous reality
On 9 June, the Government of Pakistan unveiled a Pakistani rupee (PKR) 14.46 trillion budget (roughly $50.45 billion). According to the new budget, the overall fiscal deficit for the financial year 2023-24 (till 30 June 2024) stands at PKR 6.95 trillion, which is roughly 6.53 per cent of the GDP.
Approximately 50.5 per cent of the estimated expenditure for the fiscal year 2023-24 has been allocated for interest payments, amounting to PKR 7.3 trillion (roughly $25 billion).
The government hopes to raise around PKR 7.1 trillion from external sources by 30 June 2024. Other than funds from the IMF, this includes, among others, an estimated PKR 580 billion in new financing from Saudi Arabia (around $2 billion), PKR 290 billion ($1 billion) from the UAE, and PKR 1.16 trillion from SAFE (roughly $4 billion).
Provided all of this pans out, Pakistan’s government estimates a total of PKR 4.3 trillion in foreign loan repayments and PKR 4.6 billion in short-term credit repayments. The estimated net revenue from external resources stands at PKR 2.724 trillion.
It should be noted that revenue estimates from external sources include amounts that have not been confirmed yet.
For instance, although the SBA is pending approval by the IMF executive board, the government has budgeted at least $2.5 billion from the international agency. The agreements with Saudi Arabia and the UAE, while announced by the Federal Finance Minister, are still awaiting confirmation.
Budget estimates for federal revenue receipts stand at PKR 9.4 trillion, around 30 per cent higher than the revised estimate for the previous fiscal year, which was PKR 7.2 trillion.
To close the IMF deal, the Pakistan government has had to take multiple steps, including an interest rate hike of 100 basis points to 22 per cent.
The IMF has also emphasised the need for reforms in Pakistan’s power sector. In a press statement last week, the agency noted that the sector is facing liquidity issues “with further buildup of arrears (circular debt) and frequent loadshedding”.
To address this, Pakistan’s National Electric Power Regulation Authority on 7 July determined a base tariff increase of PKR 6.90 per unit for the financial year 2023-24, raising it to PKR 31.70 per unit from the current PKR 24.80 per unit, as reported by The News International.
According to The Express Tribune, a Pakistani English-language newspaper, approximately 15 days after revealing the 2023-24 budget, the Finance Minister of Pakistan introduced new taxes amounting to PKR 215 billion ($780 million) and implemented budgetary cuts of PKR 85 billion ($310 million). These measures, equivalent to approximately $1 billion in spending reductions and increased taxes, were implemented to placate the IMF.
Uzair Younus, director of the Pakistan Initiative at the Atlantic Council, a US-based think tank, told ThePrint that in the short-term, the immediate fallout from these adjustments would be inflationary in nature.
Notably, according to a Reuters report, adjustments made by Pakistan to secure the IMF deal have contributed to a year-on-year inflation rate of 38 per cent in May, the highest in Asia.
Explaining how the fiscal deficit of Pakistan widened over the last few years, Younus said: “The interest rate environment changed. During the pandemic, the government cut interest rates. Post-pandemic, as a part of the IMF programme, interest rates were increased and along with the fall of the PKR, the markups on the interest rates increased.”
He added that it should also be understood that while tax collected in nominal terms has increased, “the tax-to-GDP ratio highlights that things have not improved”.
The question that arises now is whether Pakistan will be able to achieve its estimated revenue targets from higher collection of taxes and external financing, as projected by the government— or if it will miss these targets, as has been the case in previous years.
On debt row
In a 14 June column in Dawn, Pakistani journalist Khurram Husain explained that Pakistan could be in danger of defaulting on its external obligations this fiscal year because of its “dangerously low foreign exchange reserves and a steep debt repayment schedule looming”.
Citing data “obtained unofficially”, he wrote that Pakistan has roughly $8.7 billion of payments on public debt scheduled in FY24, that are not subject to rollovers. ThePrint could not independently verify these numbers.
According to the IMF staff report released in September 2022, another $5 billion in private debt outflows is expected for the year, bringing the total expected outflows to $13.7 billion.
As reported by Dawn, even assuming that the Pakistan government is able to maintain zero current account deficit, ensuring the rollover of debts, debt payments made on time and no external financing, its foreign exchange reserves would hit negative by December 2023.The article says that a payment of $1.6 billion is due in the month of July, including $1 billion in a loan from SAFE.
The article further notes that even if the Pakistan government is able to negotiate a rollover of the SAFE loan maturing, it still has to repay around $600 million in July 2023. Additionally, there is a $2.3 billion loan from a consortium of Chinese banks announced in June 2022, which will be due in June 2024, unless the Government of Pakistan is able to get another rollover. That raises the total estimated outflows for June 2024 to $3.8 billion according to Dawn.
The numbers of debt payments reported in Dawn and the budget documents of Pakistan are different. The budget sees an expected PKR 4.3 trillion (roughly $15.5 billion) in repayments. If this is the case, along with the estimated current account deficit at $6 billion, the total external financing required rises to $21.3 billion.
As Hussain writes: “The possibility of landing up in a situation where the foreign exchange reserves can no longer support even the basic life support systems of the economy is now a clear and present danger.”
Younus explained to ThePrint that the plan in the interim is to use the SBA for the immediate financing needs until the upcoming general elections in Pakistan.
“After the elections, if held on time, you would see the new government negotiate for a long-term IMF programme at the end of the year,” he added.
China — Pakistan’s Pandora box
Pathak, speaking to ThePrint, said that over 80 per cent of bilateral debt to be serviced by Pakistan is to China.
“From what is known, the bilateral debt of Pakistan with China is roughly $14.5 billion. Only multilateral institutions with comparable amounts of lending to Pakistan are the World Bank and the Asian Development Bank,” she added.
She also explained how just last year over two dozen Chinese firms threatened to stop supplying power to the Pakistani grid unless the Pakistan government paid dues worth $1.59 billion.
In May 2022, 30-odd Chinese companies, operating in Pakistan under the China-Pakistan Economic Corridor (CPEC) submitted a long list of complaints to the Pakistan government, with 25 representatives from Chinese independent power producers (IPPs) threatening to shut down unless all payments were made upfront.
“Chinese loans come with ‘no strings attached’ in comparison to IMF or World Bank loans. Multilateral institutions talk about democracy and human rights, while the Chinese do not. But is it really no strings attached, if China will collect through other means – such as a strategic port in Gwadar?” Pathak added.
She further explained that China has no history of foregoing loans, despite the economic crisis being faced by their allies in Pakistan, as this would reduce the leverage the Chinese government holds over the government of Pakistan — essentially leaving Pakistan with an open Pandora’s box.
This report has been updated to reflect that Uzair Younus explained how the fiscal deficit of Pakistan widened over the past few years, and not the current account deficit as published earlier. The error is regretted.
(Edited by Asavari Singh)
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