IMF aid boosts Pakistan’s economy in January, but challenges remain

February 16, 2024 (MLN): The International Monetary Fund's injection of financial aid helped boost Pakistan's economic activity in January, according to Bloomberg Economics tracker.

Even so, there are three developments that are likely to weigh on activity in the coming months - continued political instability following the February 08 election, the likelihood of harsher conditions linked to additional IMF loans, and the rising chances of the State Bank of Pakistan delaying rate cuts.

January's economic activity rose 0.9% from December, ending a run of four consecutive months of contraction.

IMF loans issued in January brought dollars into the economy. This, along with relaxed trade restrictions, allowed for increased purchases of key import supplies, helping to drive up activity.

But there are headwinds ahead. The inconclusive February 08 election means political uncertainty is set to linger, which could hinder fresh investment.

A weak coalition government, the most likely outcome is likely to face tougher conditions for aid under the new IMF program.

A new IMF program, after the current one ends in April, is needed to avoid a default over the medium term and tougher loan conditions are likely to hit near-term growth.

In addition, the market now expects the US Federal Reserve to start easing from June, a push-back from earlier hopes of a March cut.

As such, the odds are rising that the SBP won't start easing in March, as Bloomberg currently expects.

If the central bank starts easing in March and before the Fed, that could put downward pressure on the rupee.

Also, the government significantly raised gas prices on February 15, which will drive inflation higher and further stack the odds against a March cut.

Given these recent developments, Bloomberg Economics will soon be revising down its growth outlook.

Bloomberg currently expects GDP to grow 2.1% in the year through June 2024, up from a 0.2% contraction in the previous fiscal year.

The consensus estimate is 2.5% and the IMF's forecast is 2%.

To note, Bloomberg Economics monthly tracker looks at inflation-adjusted indicators of activity.

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