IMF estimates Pakistan’s financing gap to be $9.1bn over three years

ISLAMABAD: Pakistan’s external financing gap stands at $9.1 billion over the next three years period, exposing Islamabad’s vulnerability and need for the next bailout package under the Extended Fund Facility (EFF) from the International Monetary Fund (IMF).

The IMF’s latest report on Pakistan showed that Pakistan’s external financing gap stands at $9.091 billion over the next three years from 2024-25, 2025-26, and 2026-27. In four years from 2024-25 to 2027-28, the total external financing gap without IMF support has been estimated at $10.188 billion.

Pakistan and the IMF have already kick-started parleys in Islamabad for clinching a fresh deal under the EFF with a possible size of $6 to $8 billion along with augmentation through climate finance.

A five-member IMF technical team has already reached the federal capital. Last Friday, the IMF team exchanged data with the Ministry of Finance and Federal Board of Revenue (FBR) high-ups.

IMF’s Mission Chief Nathan Porter is expected to join the visiting IMF team next week starting from Monday.

The IMF has assessed that Pakistan’s external financing needs stood at $21.044 billion, $23.111 billion, and $22.716 billion over the next three-year period from 2024-25 to 2026-27. The Fund estimated financing gap stands at $4.335 billion in the fiscal year 2024-25, $3.571 billion in the financial year 2025-26, and $2.185 billion in 2026-27.

If Pakistan prefers to clinch a deal of four years, the IMF assessed the financing gap in the fiscal year 2027-28 would be estimated at $1.097 billion.

On external debt repayment capacity, the IMF has raised serious questions. In the staff report, it said Pakistan’s capacity to repay the Fund is subjected to significant risks and remains critically dependent on policy implementation and timely external financing.

The Fund’s exposure reaches (Special Drawing Rights) SDR 6,546 million (322 percent of quota, approximately 102 percent of projected gross reserves at end-April 2024) with completion of all purchases under the Standby Arrangement (SBA).

“Exceptionally high risks — notably from delayed adoption of reforms, high public debt and gross financing needs, low gross reserves and the SBP’s net FX derivative position, a decline in inflows, and sociopolitical factors — could jeopardise policy implementation and erode repayment capacity and debt sustainability,” the IMF said and added that restoring external viability is critical to ensure Pakistan’s capacity to repay the Fund, and hinges on strong policy implementation, including, but not limited to, external asset accumulation and exchange rate flexibility. Geopolitical instability is an additional source of risk, even as uncertainty surrounding global financial conditions has declined somewhat since the last review.

The IMF report said that the SBA poses significant enterprise risks which are largely unchanged from the time of the first review. These include risks related to credit concentration, capacity to repay, reputation and engagement, sociopolitical tensions and the security situation.

In addition to the factors discussed in the first review, there is further mitigation from the newly formed government’s intention to continue the policy adjustment after the SBA, and interest in a successor arrangement from the Fund, although political uncertainty remains significant.

Despite placement of much hyped Special Investment Facilitation Council (SIFC), the IMF staff report assessed that Pakistan’s ability to attract foreign direct investment (FDI) would be hovering around $1.25 billion in FY2024-25, $1.5 billion in FY2025-26 and $1.9 billion in FY2026-27. The IMF has projected the FDI might go up to $2.3 billion in FY2027-28.

Ministry of Finance former adviser Dr Khaqan Najeeb said engagement with the IMF under the SBA has helped achieve nascent macro stability. External pressures have eased with a significant drop in the current account deficit, a gradual buildup of reserves, however inflation has moderated but still remains elevated.

He felt a new engagement with the IMF could cement the stability, however, it would be a tough programme as authorities would need to develop strong reforms to manage external payments and rising debt levels along with fiscal consolidation. Pakistan’s low tax to GDP continues to be challenging for the authorities and tax gaps and enforcement remain unaddressed for many years. Expenditure reforms have remained a pipe dream and are less well understood. Energy sector requires a plan much beyond pricing changes entailing a redesign of the sector with operations to be handed over to the private sector and an overhaul of the regulatory regime. It is a tough balance for the authorities and requires tremendous homework to ensure the brunt of the reform policies is borne by those with concessions and exemptions.

“At the same time, we should be able to convince the fund for the cost of living relief for the vulnerable and low middle-income earners. The key is to see whether Pakistan can take the necessary measures to develop a growth framework in parallel to a context-based programme with the IMF to unleash a competitive domestic private sector and push investment levels and productivity in the country,” Dr Khaqan said.

The numbers put together by the IMF in their recent macro framework point to a subdued level of investment and savings levels in the country. This would require a lot of effort to turn around, concluded the expert on economy.

Meanwhile, IMF’s Resident Chief in Pakistan Esther Perez Ruiz told The News that “A mission team led by Nathan Porter, IMF’s Mission Chief to Pakistan, will meet with authorities next week to discuss the next phase of engagement. The aim is to lay the foundation for better governance and stronger, more inclusive, and resilient economic growth that will benefit all Pakistanis.”