IMF's Critique of Pakistan's Budget Raises Likelihood of Default: Bloomberg

The latest budget presented by Pakistan has come under sharp criticism from the International Monetary Fund (IMF), a development that has raised concerns about the IMF's continued funding for Pakistan's bailout program set to expire on June 30. Bloomberg has warned that if the IMF chooses not to release further financial aid, the Pakistani economy could face severe consequences. According to Ankur Shukla, South Asia Economist for Bloomberg Economics, if the IMF's bailout program remains stalled, Pakistan could experience a significant dollar shortage in the first half of the upcoming fiscal year, increasing the risk of default. This could also lead to lower economic growth, higher inflation, and increased interest rates in fiscal 2024.

One of the immediate challenges Pakistan faces is the need to repay an additional $4 billion between July and December, which cannot be rolled over. With foreign exchange reserves likely to be below $4 billion at the start of fiscal 2024, the specter of default looms large, as highlighted by Bloomberg Economics.

Between July-December, Pakistan must repay an additional $4 billion (which cannot be rolled over).

With FX reserves likely below $4 billion at the start of fiscal 2024,

default seems highly likely: Bloomberg Economics

The IMF expressed dissatisfaction with the budget proposals put forth by Pakistan's Finance Minister Ishaq Dar for fiscal year 2023-24, criticizing the missed opportunity to expand the tax base and the creation of a potentially harmful amnesty scheme.

With the IMF's focus now shifting towards the need for a primary surplus in the budget, concerns about Pakistan's debt repayment obligations have intensified. Shukla estimated that approximately $900 million in debt must be repaid this month, and without IMF aid, the country's reserves will likely dwindle by June's end.

In the absence of an IMF program, Pakistan's ability to secure fresh external funding options appears bleak. Furthermore, negotiations with the IMF for a new bailout are unlikely to commence until after the elections in October, leading to a prolonged period of economic uncertainty. Shukla projected that even if an agreement is reached, the disbursement of actual aid under a new program may not occur until December.

In the interim, Pakistan will have to conserve its foreign exchange reserves by restricting imports, maintaining a current account surplus, and seeking assistance from friendly nations to avert a fiscal crisis in the first half of 2024.

The situation also necessitates import restrictions and potential interest rate hikes by the State Bank of Pakistan to further curtail import demand and conserve foreign exchange reserves. The downside of these measures is that they are likely to result in higher inflation, which could affect production and consumption negatively.

The absence of IMF aid this month would also result in weaker economic growth in fiscal 2024 than the current forecast of 2.5%, potentially burdening the government with higher debt servicing costs. Nearly half of the funds allocated for fiscal 2024 have been earmarked for servicing the existing debt.

For Pakistan's economically challenged state, the resumption of the IMF bailout program is imperative. The country's foreign exchange reserves currently stand at a precarious $4 billion.