The International Monetary Fund (IMF) cautioned on Friday that the economy faces significant downside risks, as stated in its recent staff report preceding discussions between the government and the IMF on a longer-term program. An IMF delegation is slated to visit Pakistan this month for talks regarding a new program, coinciding with the government’s initiation of its annual budget formulation for the upcoming fiscal year.
The IMF underscored the persistence of substantial downside risks, noting that while the new government has expressed commitment to continuing standby arrangement (SBA) policies, political uncertainty remains a major concern. Furthermore, the IMF highlighted the potential impact of political intricacies and the high cost of living on policy formulation. It warned that deviations from planned policies, coupled with reduced external financing, could jeopardize the already narrow path to debt sustainability and exert pressure on the exchange rate.
Additionally, the IMF cautioned against the adverse effects of rising commodity prices, shipping disruptions, or tighter global financial conditions on Pakistan’s external stability, given its precarious financial situation. Emphasizing the importance of timely disbursements of post-programme external financing, the IMF stressed the need for consistent support.
Last month, Pakistan successfully concluded a short-term $3 billion programme, averting sovereign default. However, Prime Minister Shehbaz Sharif has emphasized the necessity for a fresh, longer-term programme to address underlying economic challenges. Although the economy has stabilized since narrowly avoiding default last summer, with inflation dropping to approximately 17 percent in April from a peak of 38 percent last May, Pakistan still grapples with a significant fiscal deficit. While import control measures have curbed the external account deficit, they have contributed to stagnant growth, projected to hover around 2 percent this year, compared to negative growth last year.
Pakistan is anticipated to seek at least $6 billion and request additional financing from the Fund through the Resilience and Sustainability Trust to bolster its economic resilience.
