Pakistan could default without IMF bailout programme, warns Moody's

An engagement with the IMF beyond June would support additional financing from other partners

LAHORE (Web Desk) - Pakistan could face default without an International Monetary Fund (IMF) bailout programme as the country is likely to embrace uncertain financing options beyond June, Bloomberg reported while quoting Moody’s Investors Service on Tuesday.

“We consider that Pakistan will meet its external payments for the remainder of this fiscal year ending in June,” Grace Lim, a sovereign analyst with the ratings company in Singapore, was quoted as saying in an emailed response to Bloomberg.

“However, Pakistan’s financing options beyond June are highly uncertain. Without an IMF programme, Pakistan could default given its very weak reserves.”

The remarks come as Pakistan remains engaged with the Washington-based lender to resume its bailout programme that has been stalled at the ninth review since November last year.

Various measures including a floating exchange rate, additional taxes, and hike in energy tariffs have failed to convince the IMF to resume the bailout.

Instead, the IMF reiterated that it is working with Pakistani authorities to bring the pending ninth review to conclusion “once the necessary financing is in place and the agreement is finalised”.

Pakistan has secured nearly half of its necessary financing after its officials said Saudi Arabia and UAE have pledged providing a combined $3 billion.

However, the amounts are yet to be deposited in Pakistan’s central bank, and its official foreign exchange reserves still stand at a precarious level.

The country has been faced with a barrage of woes in recent months with the perceived default risk and downgrade by international ratings agencies reflecting the state of the economy that has also had to bear major political turmoil and frequent change in key leadership.

An engagement with the IMF beyond June would support additional financing from other multilateral and bilateral partners, which could reduce default risk, said Lim.

S&P Global Ratings said Pakistan’s gross external financing needs as a proportion of current-account receipts plus usable reserves is estimated to rise to 139.5% in fiscal year 2024 from 133% in 2023, added the Bloomberg report.

“We consider the IMF programme to be a foundation for important fiscal policy reforms,” Andrew Wood, a sovereign analyst at S&P in Singapore, was quoted as saying by Bloomberg. “Agreement on the current review cycle could also coalesce more confidence for other bilateral and multilateral lenders to Pakistan.”

Back in March, Bloomberg economists said that the IMF could release funding to Pakistan by June under a bailout package, but warned the country could be heading towards default if this does not happen.

“Our base case is that the IMF will deliver the remaining $2.6 billion in aid under the current bailout program by June – helping Pakistan wiggle through the immediate crisis – as the country has fulfilled most of the IMF’s conditions,” wrote Bloomberg economists Ankur Shukla and Abhishek Gupta back then.

Pakistan entered into a $6.5 billion programme with the IMF in 2019. But the programme’s ninth review for the release of $1.2 billion is pending since October last year as the government has been unable to meet some of the pre-requisites set by the lender.

-- WB, IMF dash Pakistan's hope to get loans anytime soon --

Pakistan is not on the agenda of International Monetary Fund’s (IMF) meetings as a result of which the ninth review under the Extended Fund Facility (EFF) will be delayed.

Moreover, the World Bank also put a damper on efforts to get foreign loan by linking its second RISE-II (Resilient Institution for Sustainable Economy) loan with the completion of the stalled IMF programme.

The IMF executive board issued schedule of its meetings to be held till May 17 on its website. The next meetings are scheduled for May 11, 15, and then again on May 17, 2023.

According to the IMF Staff report “Pakistan: Seventh and Eighth Reviews of the extended arrangement”, the deadline for the ninth review was November 3, 2022, but was delayed due to the failure of the government to implement agreed time-bound conditions and structural benchmarks, as well as, violation of the spirit of the agreed seventh and eighth review, particularly with respect to controlling the rupee rate artificially without the necessary reserves to intervene in the market and extending unfunded electricity subsidy to exporters.

The tenth review’s schedule as per the seventh/eighth review documents was February 3, 2023, but the ninth review is yet to be completed.

According to insiders, the IMF was working with the Pakistani authorities to bring the ninth review to a conclusion once the necessary financing was in place and the agreement is finalised.

World Bank

The World Bank’s second RISE-II loan is worth $450 million. However, the bank’s condition for approval of its loan has compounded the PDM government’s problems.

The Pakistan government was eyeing a total $700 million loan as the Asian Infrastructure Investment Bank (AIIB) was to provide $250 million. But the World Bank dashed the incumbent PDM government’s hopes.