ISLAMABAD: The International Monetary Fund (IMF) has stated that the risks to debt sustainability remain acute given very large gross financing needs and the persistent challenges in obtaining external financing besides real interest rates are projected to become an adverse driver of debt dynamics in the coming years.
The IMF staff report prepared by staff team after the final review of Stand-By- Arrangement (SBA) and released on Friday stated: provided that program policies are sustained over the medium term and assuming adequate multilateral and bilateral financial support, public debt would remain sustainable and on a downward path.
Staff and the authorities agreed that a ceiling on government guarantees remains a key tool for limiting debt risks outside of the general government perimeter, and the authorities have advanced work to include SOE debts related to commodity operations in the guarantee perimeter.
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Over the medium term, risks arise from large public sector external rollover needs, a persistent current account deficit, a difficult external environment for Eurobond and Sukuk issuance, and limited reserve buffers. Pakistan’s capacity to repay the Fund is subject to significant risks and remains critically dependent on policy implementation and timely external financing.
The Fund’s exposure reaches SDR 6,546 million (322 percent of quota, approximately 102 percent of projected gross reserves at end-April 2024) with completion of all purchases under the SBA.
Exceptionally high risks—notably from delayed adoption of reforms, high public debt and gross financing needs, low gross reserves and the SBP’s net FX derivative position, a decline in inflows, and socio-political factors—could jeopardise policy implementation and erode repayment capacity and debt sustainability.
Restoring external viability is critical to ensure Pakistan’s capacity to repay the Fund, and hinges on strong policy implementation, including, but not limited to, external asset accumulation and exchange rate flexibility. Geopolitical instability is an additional source of risk.
The SBA poses significant enterprise risks which are largely unchanged from the time of the first review. These include risks related to credit concentration, capacity to repay, reputation and engagement, socio-political tensions, and the security situation. In addition to the factors discussed in the first review, there is further mitigation from the newly formed government’s intention to continue the policy adjustment after the SBA, and interest in a successor arrangement from the Fund, although political uncertainty remains significant.
The report noted that downside risks remain exceptionally high.
While the new government has indicated its intention to continue the SBA’s policies, political uncertainty remains significant.
A resurgence in social tensions (reflecting the complex political scene and high cost of living) could weigh on policy and reform implementation.
Policy slippages, together with lower external financing, could undermine the narrow path to debt sustainability and place pressure on the exchange rate.
Delays in post-program external financing disbursements would also place further pressure on banks to finance the government (further exacerbating crowding out of the private sector). Geopolitically driven higher commodity prices and disruptions to shipping, or tighter global financial conditions, would also adversely affect external stability.
Another risk identified by the Fund is that the annual FBR revenue targets remain unchanged but there are risks of shortfalls in April and May 2024 due to holidays that will see port closures and weigh on revenue collection, therefore additional efforts are also needed to meet the SBA’s revenue administration goals.
Considering the risks to inflation and the criticality of re-anchoring expectations to the SBP’s medium-term inflation objective, staff welcomed the MPC’s decision to keep policy rates on hold.
Although this SBA broadly achieved its narrow objectives, the challenges ahead remain uncomfortably high and will require sustained efforts to effectively address them.
Pakistan’s fiscal and external vulnerabilities remain very high, including debt sustainability and refinancing risks as well as crowding out of the private sector, and structural weaknesses constrain productivity, investments, and growth.
The SBA recognised that resolving Pakistan’s structural challenges will require continued adjustment and creditor support beyond the program period.
It is now critically important that the effort that started under this SBA continues. In this regard, the authorities’ interest in a successor arrangement is welcomed to anchor the policy adjustment in the coming years, restore Pakistan’s medium-term sustainability, and pave the way for strong and inclusive growth.
Reuters adds: Downside risks for the Pakistani economy remain exceptionally high, the International Monetary Fund (IMF) said on Friday, in its staff report on the country, ahead of talks with the fund on a longer term progamme.
“Downside risks remain exceptionally high. While the new government has indicated its intention to continue the SBA’s policies, political uncertainty remains significant,” said the fund in its staff report following the second and final review under the standby arrangement (SBA).
The fund added that political complexities and high cost of living could weigh on policy, adding that policy slippages, together with lower external financing, could undermine the narrow path to debt sustainability and place pressure on the exchange rate.
The IMF also said higher commodity prices and disruptions to shipping, or tighter global financial conditions, would also adversely affect external stability for the cash-strapped nation.
The fund stressed the need for timely post-program external financing disbursements.
Pakistan last month completed a short-term $3 billion programme, which helped stave off sovereign default, but the government of Prime Minister Shehbaz Sharif has stressed the need for a fresh, longer term programme.
Pakistan narrowly averted default last summer, and its $350 billion economy has stabilised after the completion of the last IMF programme, with inflation coming down to around 17% in April from a record high 38% last May.
It is still dealing with a high fiscal shortfall and while it has controlled its external account deficit through import control mechanisms, it has come at the expense of stagnating growth, which is expected to be around 2% this year compared to negative growth last year.
Pakistan is expected to seek at least $6 billion and request additional financing from the Fund under the Resilience and Sustainability Trust.
Copyright Business Recorder, 2024
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