Economic Crisis Deepens

Pakistan finds itself in a race against time to arrange external financing in order to instill some semblance of normalcy within the economic sphere. With less than three weeks remaining, the IMF has laid out its expectations, and Islamabad is yet to fulfill the three requirements in order to partially unlock some of the $2.5 billion tranche. All eyes are now focused on the budget that will be presented on Friday, and there are fears that the government will predictably go for populist measures in the run-up to the general elections, which will of course be in contravention of the IMF guidelines.
Esther Perez Ruiz, the IMF’s resident representative for Pakistan, has stated that there is only time for one last IMF board review before the scheduled end of the $6.5 billion Extended Fund Facility (EFF). Currently, Pakistan has barely enough currency reserves to cover one month’s imports. The hope was that $1.1 billion of the funds could be released in November, however, as reported last week, the IMF has outlined three conditions that need to be met before it makes any more disbursements. These, of course, include the proper functioning of the FX market, an FY24 budget in line with the programme objectives, and credible financing commitments to close the $6 billion funding gap.
The government has its hands full with just three weeks to go before the program expires. With regard to the financing gap, Islamabad has obtained commitments from the UAE and Saudi Arabia, but it is still $2 billion short. As far as the FX market goes, analysts suspect that authorities are still trying to manage the exchange rate, despite some measures earlier in the year to remove daily limits on fluctuations.
Now we come to the budget that is set to be presented on June 9. The IMF has made it clear that the budget should balance the need to strengthen debt sustainability prospects while creating space to increase social spending. The kind of revenue-generating mechanisms that have to be identified to make this possible makes this task close to impossible given our trajectory and history.
With the general election looming, experts are of the view that the government will announce vote-winning measures on Friday, even if the promises have to be scaled back later. These could potentially include a pay rise for government employees, an agriculture sector package, and potential amnesty schemes too. The hope is that better sense prevails and we try to bring an end to this cycle, otherwise, a budget full of populist measures will be unable to survive the July-September quarter considering how desperately we need external financing support.

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