External financing in FY2025-26

One of the key indicators in the federal budget is the projected level of external financing to partly finance the budget deficit. The expectation in 2024-25 was that there would be total external financing inflow of approximately US$10.3 billion into the federal government account, excluding rollovers. Net of repayment the financing was expected to be US$2.3 billion.

The Ministry of Economic Affairs has recently reported on the gross inflows up to the end of April 2025. They have aggregated to US$5.7 billion, equivalent to only 55 percent of the annual target. They should have reached 83 percent of the annual target by the end of April.

The biggest shortfall is in commercial loans. The target is US$3.8 billion, whereas the actual loans received aggregate to less than US$0.8 billion. Given the enhanced risk perceptions of lending to Pakistan, it is not surprising that private creditors have reduced their exposure to Pakistan.

The surprising outcome is the significant shortfall also in inflows from multilateral development agencies. The Asian Development Bank is, more or less, on target and has disbursed 76 percent of its annual commitment by April. However, the big shortfall is in the inflows from the World Bank. Only 51 percent of the annual target has been met up to April.

The IMF Staff Report of the 17th of May, following the first review of the IMF Programme, contains estimates of the likely inflow of external financing by the end of 2024-25.

These IMF estimates include the requirements of inflows to the private sector in Pakistan. The good news is that the expectation is of a gross inflow of US$18.9 billion, including rollovers, which will be $2.5 billion above the requirements of amortization of debt.

The expectation is that the foreign exchange reserves of the SBP will rise by $4.5 billion by the end of 2024-25. US$2 billion will be the inflow from the IMF, which has already taken place.

Consequently, the projection is that by end of June 2025, the level of foreign exchange reserves will reach US$14 billion. This will provide import cover of 2.8 months and put Pakistan in a somewhat more secure position.

There is need, however, to appreciate that total external inflows, of both foreign direct investment and loan financing, will be significantly smaller in 2024-25. Inclusive of inflows into the private sector, the IMF estimate of the actual external financing of Pakistan is US$20.9 billion. This is 23 percent less than the total inflow of US$26.3 billion in 2023-24.

We turn now to the outlook for 2025-26. The first part of the external financing requirement is the size of the current account surplus or deficit in the balance of payments. The IMF Staff report has projected a small deficit of US$1.5 billion.

Exports are expected to show a growth rate of 5.4 percent, while imports are projected to increase by 3.4 percent. The turmoil in the global trade after the US announcement of higher tariffs is likely to adversely impact on the volume of global trade. Further, the shortfall in major crop outputs like cotton and wheat will raise the volume of agricultural imports. Also, if a target GDP growth rate of 3.6 percent is to be achieved then this will imply larger imports of inputs and capital goods.

The IMF has been cautious about the level of remittances, which are likely to increase by 20 percent in 2024-25, and are the main reason for a near zero current account deficit. The expectation is that they will fall marginally in 2025-26. Also, only 3 percent growth is anticipated in interest payments and repatriation of profits. The latter may be significantly higher due to increase in risk perceptions about investment in Pakistan.

Overall, there is the risk that there may be a larger deficit in the current account in 2025-26, which could approach US$4 billion, equivalent to almost 1 percent of the GDP. The balance of payments projections of the IMF for 2025-26 are based on a double-digit depreciation of the rupee.

The projection of the level of amortization of external debt, both public and private, is of a significant increase of almost 18 percent. It is expected to rise from US$14.7 billion in 2024-25 to US$17.3 billion in 2025-26. Fortunately, repayment to the IMF will be less by almost $1 billion.

Turning to the available financing, the IMF has been cautious about the projection of foreign direct investment in 2025-26. The expectation is that it will remain at the same level as in 2024-25 of US$2.1 billion. However, the tense security situation may lead to some postponement of investments in South Asia.

Further, the IMF is also not expecting significant increase in the disbursement of loans in 2025-26. They are projected at $17 billion as compared to US$16.7 billion in 2024-25.

Overall, the lack of optimism in the IMF projections is clearly indicated by the expectation that the available financing will be virtually the same as the total external financing requirement of US$19.3 billion. This is in contrast to the expected surplus of US$2.5 billion from sources other than the IMF in 2024-25.

The assumption in the projections is that the IMF Programme will continue throughout 2025-26. Two reviews during the year will be successfully completed and Pakistan will meet the quantitative performance criteria and implement the agreed agenda of reforms.

Uninterrupted continuation of the IMF Programme in 2025-26 will lead to a loan disbursement of $2 billion from the IMF. In addition, there will be some inflows from the resilience facility, which has not yet been included in the IMF projections. Overall, Pakistan’s reserves are projected to increase by $2 billion. In addition, there could be other prospective financing of US$1.4 billion.

Overall, the above IMF projections indicate a relatively high level of risk and uncertainty in the level of external financing in 2025-26. The requirement may be higher because of a larger current account deficit and the need for purchase of armaments. Foreign direct investment may be adversely affected by the security situation. On top of all this, Pakistan will have to continue performing well within the framework of the IMF Programme.

Copyright Business Recorder, 2025