Pakistan with comfort and tall promises sailed through the first review of International Monetary Fund paving way for $700 million new loan installment which would open gates from friendly countries.
This will bring in fresh loans and rollover funds from international financial institutions in a short term strengthening the foreign exchange reserves, easing imports and debt burden.
However, still the country has been bent upon loans where foreign direct investment showed dismal performance, exports moving at snail pace while remittance though show decent rise but still far away from the optimum level, keeping government officials on toes. Long claims and promises have been made with the International Monetary Fund to stabilize the economy, reforms have been planned, but the biggest question mark or hurdle has been the political happenings. Few argued that the current interim set up should stay for a longer period to keep the house in order and carry out the reforms and rehabilitation plan to boost the economy and keep the industrial cycle moving which for the last couple of years have landed in the minus territory. But some are of the opinion that elections are necessary to send positive message to the outer world and to improve the economy.
Vast reforms required to expand economy
The recent report of the World Bank said that the South Asian Countries in the process of having new parliament or national assembly elections would have to be cautious as foreign investment would shy away from the region and private sector growth would be slower. However, with the new government saddled in, the new finance minister would have to take such steps to help the economy grow and exports and industrial production to catch up with international standards. The new government’s foremost targets would be announcement of the federal budget and also keep things on track as per International Monetary Fund because the second review of the economy would fall in their tenure if elections are held in time, qualifying for the final review to help fetch another $1.1 billion installment, completing the short Standby Agreement signed in July last year for total value of $3 billion.
There has been general consensus prevailing in the capital market that if the new government arrives or this caretaker set up drags for another five to six months, the authorities have to enter another IMF program amounting to $5 billion to $6 billion to keep the country afloat, attracting positive nod from the foreign investors, multilateral agencies and bilateral countries. The continuation in the IMF program would help improve the country’s rating, to send a positive message to foreign investors, help improve the EuroBonds pricing, sell more bonds in the global market-one bond maturing in April 2023, attract fresh foreign investment in the capital market. Increasing the foreign exchange reserves to help ease imports flow to get industrial running at a smooth trend.
Reforms and restrictions are required on a massive scale because in the statement of International Monetary Fund while approving the $700 million loan for Pakistan clearly said economic activity has stabilized in Pakistan, although the outlook remains challenging and dependent on the implementation of sound policies.
Continued timely and consistent implementation of program policies remains critical, with no room for slippage. This requires strict adherence to fiscal targets while protecting social spending, a market-determined exchange rate to absorb external shocks, and further progress on structural reforms to support stronger and more inclusive growth, the statement said.
Ali Nawaz CEO at Chase Securities said that the IMF approval brings a positive impact to Pakistan’s economic landscape, signaling international confidence in its reform efforts.
“This endorsement can attract foreign investments, boost market sentiments, and potentially strengthen the country’s credit rating. In the stock market, the approval is likely to lead to increased investor confidence, potentially driving upward momentum”, he said.
The forex market may see a stabilizing effect, with the national currency experiencing support due to the market-driven exchange rate approach emphasized by the IMF.
“While the approved tranche of approximately $700 million provides a short-term financial boost, it may not be sufficient to cover Pakistan’s annual financing needs of $20 billion”, said Ali Nawaz. The government will need to explore additional avenues to meet its financial requirements, possibly through securing new loans from the IMF or other international sources. The new government’s ability to secure further loans will depend on its commitment to sustained reforms and addressing economic challenges.
The volume of new loans from the IMF will hinge on the fiscal discipline, effective revenue mobilization, and a commitment to long-term economic stability. The success of future negotiations will be crucial in determining the extent of financial support Pakistan can secure from international institutions, the CEO said.
Abdul Azeem, head of research at Spectrum Securities said that the IMF approval can positively impact a country’s economic stability and investor confidence by providing access to funds, signaling commitment to reforms, and stabilizing exchange rates
“The positive impact on the stock market is imminent, as this development instills confidence among investors, enhances the country’s balance of payments position, opens up additional borrowing opportunities, and acts as a catalyst for attracting increased foreign investment. Anticipated positive outcomes are poised to strengthen the PKR against the USD, with potential for a further appreciation of Rs 3-5 to a dollar.
Abdul Azeem said that the current tranche falls short of addressing external obligations, as the new government may need to pursue a more substantial program ranging between USD 5-7 billion.
Both the economic experts rightly suggested the continuation of the reforms process which can only be derived from political stability and key and timely decisions to be taken by the people sitting in the helm of affairs. The reforms need serious redoing because only slogans and speeches cannot help stabilize the economy.
“Going forward, broad-based reforms to improve the fiscal framework—mobilizing additional revenues particularly from non-filers and under-taxed sectors and improving public financial management—are required to create fiscal space for further social and economic development spending”, said Antoinette Sayeh, Deputy Managing Director and Chair, following the IMF Executive Board Discussion .
“Inflation remains high, affecting particularly the more vulnerable, and it is appropriate that the SBP maintains a tight stance to ensure that inflation returns to more moderate levels”, said . Pakistan also needs a market-determined exchange rate to buffer external shocks, continue rebuilding foreign reserves, and support competitiveness and growth. In parallel, further action to address undercapitalized financial institutions and, more broadly, vigilance over the financial sector is necessary to support financial stability.
“Boosting jobs and inclusive growth in Pakistan requires continuous protection of the vulnerable through BISP and accelerating structural reforms, most notably around improving the business environment and leveling the playing field for investors, advancing the SOE reform agenda and safeguards related to the Sovereign Wealth Fund; strengthening governance and anti-corruption institutions; and building climate resilience.”
These comments and statements are doing rounds for decades, but the authorities aren’t serious enough as recently an observation appeared that though we are able to increase the revenue collection but mostly because of the higher inflation, estimates done on the higher rates, the country’s managers are unable to put a lid on the expenses, there needs to some rethinking on the expenditure side which has been a major threat for the rising fiscal deficit.
Yawar uz zaman, Head of Research at House building Finance Company (HBFC) said that IMF’s approval for Pakistan heralds a complex yet hopeful economic scenario. While this endorsement promises enhanced fiscal discipline and potential macroeconomic stability, it also necessitates stringent reforms that could pose short-term challenges.
“In the financial sector, the stock market is likely to benefit from increased investor confidence and lower interest rates, making equities more attractive”, Yawar said.
The forex market, however, may experience restricted fluctuations due to the dual impact of IMF stabilization efforts and the pressure of higher repayment obligations. The US dollar rate is expected to stay relatively stable, influenced by both global and local economic dynamics.
“A critical aspect to watch is whether the IMF’s support will be sufficient against Pakistan’s $20 billion annual repayment needs, possibly leading to additional loan requirements”, he added. Ultimately, the success of this program hinges on Pakistan’s ability to effectively implement reforms, manage debt, and maintain economic stability in a rapidly evolving global financial landscape.
Saad Hanif, deputy head of Research at Ismail Iqbal Securities said that Stock market’s response could be mixed due to concerns about the short-term impact of the IMF’s austerity measures. However, in long term it will achieve sustainable growth. Historically, such programs have led to a gradual pickup in GDP growth and a slowdown in inflation, albeit not without challenges. In the forex market, while there might be some initial optimism but it contingent on how strictly we follow the IMF mandate. I believe at June end dollar will be at 310.
Saad Hanif said Pakistan’s challenge in managing its annual external obligations is significant, and while IMF program tranches offer crucial support, they are not usually enough to fully cover these needs. These programs primarily aim to stabilize the balance of payments and encourage further financing from other sources. The size of an IMF loan to Pakistan depends on factors like the country’s economic size, IMF quota, and specific economic challenges, with past programs typically spanning a few billion dollars over several years.
New government surely need to secure more substantial IMF loans or expand existing programs, it must show a commitment to economic reforms and fiscal discipline. The amount of any new loans would be negotiated based on Pakistan’s economic requirements, reform efforts, and repayment capacity. Successful negotiation for additional IMF support also hinges on maintaining strong relationships with international lenders and is influenced by global economic and geopolitical conditions. Beyond immediate financial relief, it’s vital for Pakistan to pursue structural reforms for long-term economic stability and growth.
