During the initial months of 2023, Pakistan seemed to be heading towards a catastrophic point, with the IMF loan program in 2019 going off track after the fund realized the commitment of Islamabad to reform was lacking, which led to the suspension of loan disbursements.
Pakistan has imposed strict restrictions on imports to avoid defaulting risk which affects many industries, and this has caused inflation and a shortage of essential commodities. Despite this, the government managed to handle the situation with the help of IMF’s 9-month program, providing financial support of $3 billion in Stand By Arrangement (SBA).
Although the defaulting risk has receded, there are economic challenges in Pakistan, as the derailment of the IMF program caused a considerable drop in forex reserves in Pakistan.
Current Status of Pakistan’s Forex Reserves
Pakistan forex reserves surged to a nine-month high after the new financial bailout and financial support from the IMF. Reserves increased to $8.73 billion by July 2023 with massive inflows from the IMF and other friendly nations, including the UAE and Saudi Arabia. The total financial support that Pakistan received from different nations and the IMF was around $4.2 billion, which helped the country stabilize its equilibrium with a 25% decline in FDI and a 13% fall in exports.
The current forex reserve in Pakistan is measured at $12.5 billion in September 2023 as opposed to the previous month’s $12.6 billion. After receiving financial support from the IMF, Pakistan’s total forex reserves stood at $14.1 billion. However, despite recent boosts, the country still faces challenges related to external debt.
Analysis of Decline
Pakistan’s forex reserves fall because of its $100 billion debt. The IMF has warned that Pakistan can become unsustainable, especially if the economy does not meet the goals of the bailout program.
The Central Bank’s report states that the risks related to debt sustainability have increased due to limited financing options from international bodies, significant funding requirements, and a reduced forex market.
It is time for the Pakistani government to focus on debt repayments. However, there is still a need for additional IMF support and programs, given these ongoing current standby arrangements. The report published by the IMF also emphasizes the need for further financial support to address the cash-strapped situation in Pakistan.
Impact on Pakistan
The reduction of forex reserves in Pakistan is characterized by a flood of sweeping disobedience movement that has emptied its forex reserves and catapulted the prices of essential goods such as milk, meat, wheat, and onion, unabating series of power blackouts and a population struggling to make a living. With this, Pakistan is almost on the edge before a political and economic meltdown occurs.
Moreover, the situation worsens because the economy faces the challenging task of loan repayment worth $73 billion by 2025 while dealing with unpredictable lending countries and a volatile political and economic landscape. The considerable debt burden of $126 billion primarily consists of external debt from Saudi Arabia and China.
The government has been connecting with a lender based in Washington to release a tranche worth $1.1 billion. However, an SLA or staff-level agreement is still awaiting despite the country’s claim of fulfilling all conditions laid down by the IMF.
The government has imposed restrictions on imports to reduce the outflow of dollars, resulting in an account surplus of $654 billion earlier this year – the highest since 2015. The government attempts to convince the activities need a $7 billion bailout package.
Pakistan’s cultural and historical ties with two main allies, Saudi Arabia and China, are deeply rooted despite these economic challenges. The involvement of China in Pakistan’s development and trade goes back to the 1960s.
Exim Bank in China has extended a commercial loan worth $600 million to Pakistan to boost its forex reserves. The economy has also received financial assistance from the UAE and Saudi Arabia, which have pledged $1 billion and $2 billion to rescue the economy from the brink.
After almost grinding to a halt during the last fiscal year, Pakistan seems to be recovering in 2023. However, the recovery is taking place slowly. The government agreed to the IMF bailout worth $3 billion in July, thereby avoiding the crisis in its balance of payment. However, to avail of this fund, Pakistan had to reduce its fuel and electricity subsidies, which has stoked inflation and stymied private spending. The monthly business activities have worsened, making consumers’ and businesses’ sentiments pessimistic.
Additionally, the dollar shortage resulting from industrial production and expensive energy stagnated. Inflation in Pakistan declined in October from 31.4% in September to 26.9% after the government reduced gasoline prices by almost 10%. In 2024, inflation could be decelerating due to the recent belt-tightening by the government and the central bank. However, the sharp increase in gas prices may push inflation higher.
Cash-strapped Pakistan aims to get more countries to help the economy with its balance of payment crises. As the economy sinks deep into unsustainable external debt, it has become important to closely assess the ostensibly beneficial partnerships providing financial support.
Pakistan may witness economic recovery with the help of the IMF bailout program and international support from China, the UAE, and Saudi Arabia. However, the situation is currently fragile, with many challenges that may push the country towards deeper economic instability if it is not correctly managed.