May 10, 2024 (MLN): Pakistan’s capacity to repay the International Monetary Fund (IMF) depends on the restoration of external viability and strong policy implementation, including, but not limited to, external asset accumulation and exchange rate flexibility.
IMF in its second and final review report highlighted 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.
The Fund’s exposure reaches SDR 6,546 million (322% of quota, approximately 102% of projected gross reserves at end-April 2024) with completion of all purchases under the SBA.
IMF highlighted that 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 jeopardize policy implementation and erode repayment capacity and debt sustainability.
Hence, 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.
