IMF Positive Projections of Pakistan Economic Environment

By: Hira Tahir

Pakistan was on the brink of an economic catastrophe in the first half of 2023. The
country’s IMF loan program, initiated in 2019, derailed due to a lack of commitment to
necessary reforms, resulting in a suspension of loan disbursements. As a consequence,
Pakistan’s foreign exchange reserves plummeted, leaving them insufficient to cover even
two weeks’ worth of imports. To avert default, the government implemented strict import
restrictions, causing a significant economic shutdown, shortages of essential goods, and
rampant inflation.
However, there is a glimmer of hope as the IMF’s Executive Board recently
approved a crucial nine-month arrangement to support Pakistan’s economic stabilization
program. The IMF completed its first review and disbursed $700 million from the $3
billion Stand-By Arrangement, fostering stability and supporting key reforms in
Pakistan’s financial framework. The successful review signifies a significant step
forward for Pakistan as it strives to achieve stability. The disbursed funds are expected
to provide vital support to the country’s financial framework, facilitating the implementation
of key reforms outlined in the IMF-supported program
Despite facing macroeconomic challenges, Pakistan’s economy is expected to
outperform projections from other multilateral agencies, according to the IMF. IMF noted
that economic activity has stabilized, although the outlook remains challenging and
contingent on the implementation of sound policies. The IMF has made revisions to its
forecast for several macro indicators. IMF estimates that Pakistan’s GDP will still reach
around 3% in FY24.Inflation is expected to remain elevated, but with appropriate policies,
it could decline to 18.5% by the end of June 2024, with an average inflation rate of
24% for FY24. In addition, there is a forecast for a substantial reduction in the policy rate
by 700 basis points in 2024, which currently stands at 22%, with a target of reaching
15% by December of the same year.
The IMF now expects gross reserves to reach $9.1 billion by June 2024, up
from the earlier estimate of $8.9 billion. Furthermore, the IMF has revised down its
forecast for the current account deficit (CAD) to 1.6% of GDP ($5.7 billion) for FY24,
compared to the previous projection of 1.8% of GDP ($6.4 billion). Pakistan’s ability
to secure a loan from the IMF is attributed to the successful implementation of policies
and initiatives undertaken by Special Investment Facilitation Council (SIFC) and the
government. These efforts have created a favorable economic environment, enabling
Pakistan to meet the necessary criteria for obtaining financial assistance from the
IMF. Overall, the IMF’s revised forecasts suggest cautious optimism for Pakistan’s
economy, highlighting the importance of implementing effective policies to address
challenges and sustain progress.
The Pakistani rupee has maintained relative stability over the past few months.
This stability has been further reinforced by the country’s stronger foreign exchange
reserves and the recent approval from the IMF to release approximately $700 million as
part of a $3 billion bailout for Pakistan. These developments have contributed to the
rupee’s strengthening and have brought about greater stability to the currency. Pakistan
faces a significant challenge in repaying $77.5 billion in external debt from April 2023 to
June 2026. This burden is particularly heavy considering the size of Pakistan’s $350
billion economy. However, there is potential for additional dollar funding to alleviate this
pressure. Topline Securities suggests that bilateral and multilateral sources, as well
as allied countries like the United Arab Emirates, China, and Saudi Arabia, may
provide further financial support once approved by the IMF board. This assistance
would help bolster foreign exchange reserves and ease the burden of external debt
repayment for Pakistan.
The SBA reform program focuses on several crucial components to address the
challenges faced by Pakistan. These include the implementation of the current budget,
which will facilitate necessary fiscal adjustments and contribute to achieving debt
sustainability. The program also emphasizes the continuation of a market-driven
exchange rate, ensuring stability and efficiency in the currency market. Additionally, there
is a need for appropriate tightening of monetary policy to combat inflation and promote
disinflation. Furthermore, the reform program emphasizes the importance of making
progress on structural reforms, with a particular focus on enhancing the viability of the
energy sector, improving the governance of state-owned entities, and promoting climate
resilience. By addressing these key elements, Pakistan aims to strengthen its economic
stability and foster sustainable growth.
Under the IMF program, the Pakistani government has made a commitment
to persistently carry out reforms aimed at enhancing various aspects of the
economy. These reforms encompass initiatives to enhance tax collection, fortify
the financial sector, and decrease the budget deficit. Such measures are of utmost
importance in achieving long-term, sustainable economic growth and ultimately improving
the overall well-being of the Pakistani population. By diligently implementing these
reforms, the government aims to create a stronger and more prosperous future for all
citizens of Pakistan.