The International Monetary Fund’s (IMF) criticism of Pakistan’s latest budget suggests chances are rising that the multilateral lender will opt not to release funding under its bailout programme that is scheduled to expire on June 30, warned Bloomberg in a report on Monday.

As per a note by Ankur Shukla, South Asia Economist for Bloomberg Economics, the Pakistani economy will likely be hit hard if the IMF doesn’t deliver aid by June-end.

Shukla said non-resumption of the IMF bailout, which remains stalled since November, would cause a severe dollar shortage in the first half of the coming fiscal year.

The shortage may prolong “possibly for longer — significantly raising the odds of default”.

“It would also raise the prospect of much lower growth, and higher inflation and interest rates than we currently anticipate in fiscal 2024,” said Shukla.

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 remarks come after the IMF expressed its dissatisfaction with the budget proposals announced by Finance Minister Ishaq Dar for fiscal year 2023-24, calling them a missed opportunity to broaden the tax base while criticising the new amnesty scheme that “creates a damaging precedent”.

“We had expected the IMF to focus more on the primary surplus targeted in the budget,” said Shukla.

“With at least around $900 million in debt that must be repaid this month, the reserves will fall by June-end unless the IMF aid comes,” noted Shukla.

“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,” warned the Bloomberg economist.

The economist was of the view that without an IMF programme, Pakistan’s options for fresh external funding will “likely be very limited”.

Meanwhile, negotiations with the IMF on any new bailout aren’t likely to start until after elections in October, noted Shukla.

“Reaching an agreement will take time. We can safely assume that any actual aid disbursement from the IMF under a new program will not happen until December,” projected the economist.

“In the meantime, the country will need to conserve dollars by limiting import purchases — and keeping a current account balance in surplus— to have any hope of being able to meet its obligations. It will also need to seek assistance from friendly nations to avert default in the first half of fiscal 2024,” said Shukla.

Shukla said that the economy will likely be hit hard if the IMF doesn’t deliver aid by June-end.

“The authorities will have to keep import restrictions in place. The State Bank of Pakistan (SBP) will also likely raise rates above the current level of 21% to further curb demand for imports and conserve FX reserves.

“Our base case currently is that the SBP will likely remain on hold through December (but that assumed the IMF aid coming in by June-end),” Shukla said.

The continued import restrictions and a weaker rupee would lead to higher inflation in fiscal 2024 than we currently anticipate,“ the Bloomberg economist noted.

“We currently expect inflation to average 22%. Higher borrowing costs and restrictions on imports of raw materials would hit production further. Higher inflation would dampen consumption.

“If IMF aid doesn’t come this month, we expect growth to be much weaker in fiscal 2024 than our current forecast of 2.5%.

Meanwhile, “higher rates will also increase the government’s debt servicing costs,” Shukla said.

The government has allocated nearly half of its funds for fiscal 2024 to debt servicing.

The resumption of the IMF bailout programme has been deemed crucial for the cash-strapped economy, facing dwindling foreign exchange reserves which currently stand at $4 billion.

Background

Pakistan had to satisfy the IMF on three counts, which included restoring the proper functioning of the foreign exchange market, pass a FY24 budget consistent with programme objectives, and secure firm and credible financing commitments to close the $6-billion financing gap ahead of the Board meeting.

Pakistan does not feature on the IMF Executive Board calendar till June 29, according to the updated schedule as of Monday evening.