Pakistan is going through its worst economic crisis
Pakistan has received significant relief from a possible debt default thanks to a draft agreement with the International Monetary Fund, but political stability will prove key for the South Asian economy in the coming months.
The political situation has been volatile in recent weeks, with former prime minister Imran Khan ousted from power in April 2022 after more than a year of turmoil. Violence erupted across the country in May after the arrest of Mr Khan, who is facing more and more. 100 cases ranging from corruption to murder in various courts.
“Everything depends on whether political stability returns,” said Uzair Akil, partner at London-based Nairang Capital.
As recently as last August, Islamabad secured IMF staff approval for a $1.1 billion loan, but the bailout program was put on hold due to failure to meet certain conditions. Prime Minister Shehbaz Sharif was able to strike a new deal after several hours of phone calls and several meetings with IMF Managing Director Kristalina Georgieva.
Mr Aqeel said, “Under pressure, the government has shown that reforms can be initiated – the question now is whether they will stay on track and continue to work systematically on the issues.”
The nine-month so-called standby arrangement struck on Thursday will require approval by the IMF executive board, with a vote expected to take place in mid-July.
With foreign debt obligations of nearly $23 billion coming due in the fiscal year starting July – more than six times the country’s foreign exchange reserves – the fresh IMF support eased concerns about Pakistan’s ability to continue making payments. Could
Pakistan is passing through its worst economic crisis with record interest rates and inflation making it difficult for people to buy fuel and put food on the table.
In June the government proposed a budget plan to partially reduce the fiscal deficit through tax increases. But it will test the administration’s already frail popularity ahead of a national election later in October.
“I don’t think the government is in a position to do serious reforms right now,” said Ruchir Desai, co-fund manager at AFC Asia Frontier Fund. In fact, this is the reason why Pakistan has adopted additional arrangements, he said. “Ultimately, a long-term agreement with the IMF will be needed,” he said.
For the time being, Ruchir Desai said the deal would be “comfortable for investors”. With Pakistani stocks being so cheap – the KSE-100 index is trading at just four times earnings, according to his calculations – “I think the market will go up.”
But for sustained gains over the next few months, the upcoming elections will need to run smoothly, Mr Desai cautioned.
Markets were closed in Pakistan on Friday and are scheduled to reopen on Monday. Pakistan’s dollar bonds due in 2024 jumped on Friday.
According to Mattias Martinsson, chief investment officer at Stockholm-based frontier market investor Tundra Fonder AB, the IMF deal could help encourage other creditors to engage with Pakistan, which would bring relief to the country.
Pakistan expects Saudi Arabia and the UAE to provide a new loan of $3 billion and more investment. It is also trying to meet a pledge of about $10 billion made at a donor conference in Geneva after last year’s devastating floods.
“From our point of view, the market has already considered a default, so there is a definite positive reaction,” Martinsson said. “However, our main fears revolve around the uncertain political situation,” he added.