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Pakistan’s recession risk looms large amid IMF loan talks

By News Desk
March 16, 2023

KARACHI: Pakistan’s lingering political and economic turmoil, coupled with multiple delays in the International Monetary Fund’s bailout programme, will likely push the nation into a recession, a Bloomberg survey showed.

The probability of the economy slipping into recession stands at 70 percent, according to the median forecast in a Bloomberg survey of 27 economists.

Crisis-hit Pakistan has failed to meet several deadlines to secure funds to stave-off a default, raising concerns that it may have to pause debt repayments. To seal the bailout, authorities have raised taxes, cut energy subsidies and raised interest rates to a 25-year high to tamp down prices, but some issues are yet to be resolved.

The inability of successive governments to meet IMF’s prescriptions is leading to a delay, said Luqman Nadeem, general partner at FlatRock Associates. The current political crisis could make make the “IMF more reluctant to disburse any funds,” he said.

“There is no continuity of policies regardless of who is in power, which is a big red flag for the lender as well as any friendly countries.”

The nation’s political crisis deepened this week after clashes erupted as the police tried to arrest former premier Imran Khan, who is demanding early elections.

Pakistan needs funds to revive its $350 billion economy, ease widespread shortages and rebuild its foreign currency reserves. The nation’s dollar stockpile has fallen to less than a month’s worth of imports, restricting its ability to fund overseas purchases, stranding thousands of containers of supplies at ports, forcing plant shutdowns and putting tens of thousands of jobs at risk.

What Bloomberg Economics says..

Pakistan’s default risk is creeping even higher. Bond spreads are widening — while the International Monetary Fund deliberates on whether to resume aid. We think it eventually will, but the wait is excruciating. Meantime, dollar shortages are choking off growth.

“Severe demand destruction is taking a hold”, said Suleman Rafiq Maniya, head of advisory at Vector Securities Pvt. Companies are operating at less than 50 percent capacity amid a dollar crunch and high inflation is reducing disposable incomes, further dampening demand, he said.

Pakistan is scheduled to release its annual gross domestic product report in May. Bloomberg Economics sees the economy contracting 2.2 percent in the financial year ending June, compared with a 6 percent expansion in the previous year.

“The government policies to address these challenges have been limited in their effectiveness,” said Ehtesham Khan, chief executive officer at EK Global Capital, “A decline in GDP growth, high unemployment rates, reduced consumer spending, decreased business investment” all point toward an economic downturn, he said.