Islamabad, Pakistan (Commonwealth Union)_Pakistan’s sovereign dollar bonds rallied sharply on Friday in early European Trade as the International Monetary Fund (IMF) made the announcement of reaching a Staff-Level Agreement with Pakistan for a USD 3 billion Stand-By Arrangement (SBA). The SBA, which is subject to approval by the IMF Executive Board expected in mid-July is aimed at stabilizing Pakistan’s economy which has been teetering on the brink of default and battling a balance of payments crisis. The 2025 issue of sovereign dollar bonds enjoyed the biggest gains with the announcement, increasing 4.7 cents to trade at 52 cents in the dollar.
The SBA will support Pakistan to manage recent external shocks, preserving macroeconomic stability and providing a framework for financing from bilateral and multilateral funders. It also aims to improve domestic revenue mobilization and institute prudent spending patterns which will prompt social and development investment. The nine-month SBA of about USD 3 billion which is about 111 percent of Pakistan’s IMF quota, will build on the Extended Fund Facility programme which expired in June this year, part of a USD 6.5 billion bailout package agreed in 2019.
The IMF took into account the massive external shocks faced by Pakistan including the catastrophic floods in 2022 which impacted millions and the international commodity price spike due to the Russia-Ukraine war. Economic growth stalled due to these reasons as well as a number of policy missteps including shortages from constraints on the functions of the FX market and galloping inflation, despite attempting to reduce imports and the trade deficit. Current reserves can barely cover one month of controlled albeit essential imports.
The power sector, which formed the cornerstone of the IMF discussions is at crisis level, being indebted to a significant USD 12.58 billion leading to build up of arrears and frequent power outages. Reforms in the energy sector therefore is a top priority.
The revised 2023/24 budget which was passed by the Pakistani Parliament last week undertakes a slew of policy measures to meet the IMF demands. The budget aims to advance a primary surplus of about 0.4 percent of GDP by broadening the tax base, increasing tax collection, reversing subsidies in the power and export sectors, instituting price hikes in energy and fuel, increasing key policy rates to 22 percent, prompting a market-based currency exchange rate and arranging external financing. It also strengthens support for the vulnerable. It is vital that Pakistan executes this budget as planned and resists pressures for unbudgeted spending and tax exemptions.
Paksitan’s economic crisis which came to a head in 2022, was partly fueled by the political unrest in Pakistan fanned by the flames of bad governance, excessive external borrowings and low productivity. Dubbed the biggest crisis since its independence in 1947, the political standoff between Prime Minister Shahbaz Sharif and his predecessor Imran Khan which resulted in country-wide riots and a snap election, worsened the economic crisis. With inflation at a fifty year high running at over 30 percent, the galloping food prices has made it almost impossible to put food on the table.
In the immediate, the USD 3 billion is a life saver for this South Asian nation. But in the medium term, unless the country gets its recipe right, having to repay USD 80 billion in the coming three years on its borrowings which are at inordinately high interest rates could push it back to an even worse state than it is now.
