The International Monetary Fund (IMF) has raised serious doubts about Pakistan’s capacity to repay its debts, citing major debt-repayment challenges faced by the cash-strapped country. This assessment came to light as an IMF support team arrived in Pakistan on Friday for talks with officials regarding a fresh bailout package under the Extended Fund Facility (EFF), which Islamabad has requested.
According to a media report on Saturday, the Washington-based bank’s staff report on Pakistan, issued earlier this month, expressed concerns about Pakistan’s ability to repay the fund. The report emphasized that this capacity is contingent on successful policy implementation and timely external financing.
The report outlined several exceptionally high risks that could jeopardize policy implementation and undermine repayment capacity and debt sustainability. These risks include delayed adoption of reforms, high public debt, gross financing needs, low gross reserves, and the State Bank of Pakistan’s net FX derivative position. Additionally, a decline in inflows and sociopolitical factors could further exacerbate these risks.
The report also highlighted the critical importance of restoring external viability to ensure Pakistan’s capacity to repay the fund, emphasizing the need for strong policy implementation, including external asset accumulation and exchange rate flexibility. Geopolitical instability was identified as another source of risk, despite a decline in uncertainty surrounding global financial conditions since the last review.
The IMF estimated that Pakistan would require gross financing worth USD 123 billion over the next five years, with an expected USD 21 billion in fiscal year 2024-25 and USD 23 billion in 2025-26. The report further projected that Pakistan would seek USD 22 billion in 2026-27, USD 29 billion in 2027-28, and USD 28 billion in 2028-29.
According to sources privy to the matter, the IMF support team will discuss the first phase of the next long-term loan program with Pakistan’s financial team. The sources indicated that the advance party had arrived in Pakistan for talks, while the main IMF mission would arrive on May 16. The team will gather data from various departments and engage in discussions with Ministry of Finance officials regarding the upcoming budget for fiscal year 2025 (FY2025). The sources also revealed that the team would remain in Pakistan for over ten days.
Pakistan has sought a bailout package in the range of USD 6 to USD 8 billion for three years under the EEF, with the possibility of augmentation through climate financing. An IMF statement earlier emphasized that accelerating reforms is more critical than the program’s size, which will be guided by the reform package and balance of payments needs.
In an effort to meet a substantial gap in its external financing, Pakistan has decided to pursue a rollover of approximately USD 12 billion in debt from key allies such as China in the 2024-25 fiscal year. The federal government aims to achieve budget targets before the expected arrival of the IMF team in the country. Finance Ministry insiders disclosed that USD 5 billion from Saudi Arabia, USD 3 billion from the UAE, and USD 4 billion from China would be rolled over, with an estimate of further new financing from China to be included in the next financial year’s budget.
Pakistan anticipates receiving over USD 1 billion from the IMF under the fresh loan program, with new financing from the World Bank and Asian Development Bank also anticipated in the estimated budget. According to Finance Ministry sources, new loan program agreements will be established with financial institutions.
Negotiations for a new loan program with the IMF are expected to commence in mid-May, ahead of the budget presentation in June. Pakistan narrowly averted default last summer, and the economy has stabilized following the completion of the last IMF program. Inflation has decreased to around 17% in April from a record high of 38% in May 2022.
However, Pakistan continues to grapple with a high fiscal shortfall. While the external account deficit has been controlled through import control mechanisms, it has come at the expense of stagnant growth, which is projected to be around 2% this year compared to negative growth last year.
