Will Pakistan’s economic woes deepen?

Pakistan’s economic struggles are mounting, and it appears that a fresh IMF loan program is inevitable. Writing for Dawn, Kazim Alam highlights that analysts predict that negotiations for the next IMF program will begin shortly after the country’s October elections. The primary reason for this forecast is Pakistan’s high external financing requirements for the next fiscal year.

The IMF estimates that Islamabad will require $36.6 billion in gross external financing for 2023-24. Given the country’s expected current account deficit of $10 billion, the IMF assumes that Pakistan will raise as much as $22 billion from private creditors next year. However, experts believe that raising such a considerable amount from private creditors without IMF support will be a daunting task for Pakistan.

Yousuf M. Farooq, the Head of Research at Topline Securities, states that “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 program is unavoidable.” The fresh programme will likely be an Extended Fund Facility, a lending facility designed to provide financial assistance to countries facing medium-term balance of payments issues due to structural weaknesses that require time to address.

Pakistan has a debt crisis looming. The country faces dollar-denominated loan repayments of $73 billion in the next three years amid dwindling foreign exchange reserves. In the last seven years, Pakistan has doubled its external borrowings, increasing from $65 billion in 2014-15 (24% of GDP) to $130 billion (40% of GDP) in 2021-22.

Of the country’s total external public debt of $99 billion, multilateral debt accounts for 42%, while bilateral debt, mainly country-to-country loans, accounts for roughly 38%. Within the latter category, China holds the largest share, with Pakistan owing $23 billion. When considering the $6.7 billion in loans from Chinese banks, the largest Asian economy is Pakistan’s biggest bilateral creditor.

In conclusion, with high external financing requirements and a debt crisis on the horizon, Pakistan has few options but to seek assistance from the IMF. A fresh IMF loan program appears to be unavoidable if Pakistan hopes to address its economic struggles and avoid a potential sovereign default.

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