Ebbing of external inflows

The release of information recently by multiple sources has highlighted some worrying trends in external financing inflows into Pakistan.

The SBP (State Bank of Pakistan) has put on its website information on the balance of payments for July 2024 to January 2025.

The Ministry of Economic Affairs has simultaneously released the information for up to December 2024 and January 2025 on external disbursement of foreign assistance during 2024-25.

The Ministry of Finance has highlighted its fiscal operations, along with that of the provincial governments, in the first half of 2024-25. This also provides information on the extent of net external financing of the budget deficit.

All three sources clearly show a significant decline in external inflows, both public and private, into Pakistan in the first half of 2024-25. The decline is large enough to have led to a negative net inflow after the outflows of external debt repayment.

The concern is due to the fact that the country has been operating under the umbrella of a US$7 billion three-year Extended Fund Facility of the IMF since September.

The IMF Staff Report has been positive about larger net external inflows, both from public and private, in 2024-25. The expectation is that over the year, inclusive of the IMF financing, there will be a net inflow of US$3,376 million, leading thereby to a corresponding increase in the foreign exchange reserves of Pakistan.

The magnitude of external inflows according to the Ministry of Economic Affairs up to December 2024 has been $3,601 million. This is in relation to the annual target of $10,291 million, net of likely roll-over of deposits.

As such, only 35% of the target has been achieved. Inclusive of the inflow in January, there still remains almost 60% of the annual target to flow in from February to June.

Pakistan was in a one-year Stand-By facility with the IMF in 2023-24. The inflow in the first six months of the year was $5,459 million. This is 52% higher than the inflow in the same period of 2024-25.

Which inflows have declined? The total receipts of loans from multilateral agencies are $1,563 million.

This is 21% of lower than the level last year. In particular, the commitment of the World Bank is for $2,076 million of loans to Pakistan in 2024-25. During the first six months only 24% of the target has been achieved. Given this low volume, it is indeed a pleasant surprise that the World Bank is agreeing to an annual inflow of loans to Pakistan of US$4 billion, over the next ten years.

There is a very big decline in bilateral and private inflows. A few years ago, the former inflows used to reach annually over US$4 billion. The target for inflows in 2024-25 from China, Saudi Arabia and other countries, is now down to only $471 million.

Almost 66 percent of this small amount has been received up to December 2024.

The, more or less, complete drying up is witnessed in private loans, in the form either of purchase of Pakistani Sukuk/Eurobonds or international commercial bank loans.

The respective targets are US$1 billion and US$3.8 billion. Unfortunately, the total financing from these sources up to December is negligible at only US$500 million. Clearly, the cover provided by the IMF Programme has not been adequate to reduce risk perceptions of private lending to Pakistan.

The overall position according to the Ministry of Economic Affairs is that the inflow in the first seven months of 2024-25 has been $3,601 million. This is 35 percent of the annual target and 34% less than the inflow in the corresponding period of 2023-24.

This debacle has had a very negative implication. The SBP summary of the external balance of payments for July 2024 to January 2025 indicates that there has been a net outflow of external financing. The disbursement in the government account is $3,385 million, while the external debt amortization has been US$3,712 billion. This has resulted in a net inflow of US$327 billion.

Consequently, while the SBP’s foreign exchange reserves were rising from July to November, they have since started declining. From November 24 to mid-February 2025, they have fallen by US$836 million. As of the 15th of February, they stand at US$11,201 million, barely adequate for providing import cover of two months.

One of the quantitative performance criteria in the IMF Programme is the floor on the level of foreign exchange reserves. This was US$12,050 million for end-December. The actual level was somewhat lower at US$11,732 million. The position has worsened further and in the first six weeks of 2025 reserves have fallen by US$530 million.

The fiscal operations reported by the Ministry of Finance also indicate a major worsening of the external financing position in the first half of 2024-25. There has been negative external financing of Rs 79 billion, implying that new inflows have been less than the repayment of debt.

The position in the first six months of 2023-24 was substantially better and there was a large net inflow of Rs 608 billion, equivalent to almost US$2.4 billion.

The fundamental question is why Pakistan is seeing a big decline in external financing despite being under the umbrella of an IMF program? Is this because Pakistan is not doing an adequate job regarding the implementation of the structural reforms and policies agreed with the IMF? Or are there also negative perceptions about the security and political situation in Pakistan?

The first review of the IMF programme will probably commence in early March. How much concern will the IMF Mission show about the emerging big shortfall in external financing and the resulting pressure on the foreign exchange reserves? It would have been even worse if the SBP had not pre-empted some export earnings and remittances.

The Sri Lanka experience of dealing with the IMF is one where in the event of a shortfall, the country was expected to seek reprofiling or restructuring of debt from existing lenders.

Will Pakistan also be asked to try for the same type of reduction in external debt repayments? China is by far the biggest bilateral lender to Pakistan and the IMF may ask for Pakistan to seek some reprofiling of Chinese debt repayments.

Overall, thanks are due to Saudi Arabia and China for rolling over of their deposits. However, the external financing position still remains fragile. Hopefully, a successful completion of the first IMF review will facilitate larger external inflows into Pakistan.

Copyright Business Recorder, 2025