On April 27, 2023, a report stated that Pakistan’s economy is facing critical challenges that require urgent solutions. To address these challenges, the country must unlock foreign flows, which are crucial for its economic stability.
According to the Pakistan Stock Exchange (PSX), unlocking foreign flows is vital for the country to unlock the USD 1.1 billion pending tranche of International Monetary Fund (IMF) funding. This funding is necessary to ensure that Pakistan’s balance of payments deficit is fully financed for the fiscal year ending in June.
The signing of the Staff-level Agreement with the IMF under the 9th review of the IMF-Extended Fund Facility is still pending. However, unlocking foreign flows is critical for Pakistan’s economic stability, as the country’s external debt to GDP ratio stood at 22.4% for H1FY23.
Pakistan’s economy posted a growth of 5.97% in FY2022, showing a V-shaped economic recovery post-pandemic. The growth was broad-based, supported by a rise in the large-scale manufacturing, services, and agricultural sectors. However, a sharp slowdown is anticipated in FY2023, ranging between 1.0 – 0.5%.
The growth slowdown is mainly due to several measures adopted by the Government to compress aggregate demand pressures. These measures led to growing macroeconomic imbalances and an all-time high inflation rate. To control the build-up of balance of payment stress, the government imposed steep import controls and exchange restrictions.
Despite these measures, the State Bank of Pakistan (SBP) reported a current account surplus of $654 million in March 2023, the first time since November 2020. Cumulatively, the current account deficit fell to $3.5 billion, a sharp decline of 74% over the preceding year, as imports bill declined by 22% and remittances posted a healthy growth of 27% in March 2023.
The Pakistani rupee fell 9.6% against the USD on January 26, 2023, the biggest one-day drop in over two decades, after the foreign exchange companies removed their self-imposed cap on the exchange rate. This move towards a market-based exchange rate was a key demand of the IMF as part of a program of economic reforms.
The combination of low growth and high inflation has reversed progress on poverty reduction and sustainable development goals. Pakistan has been engaged with the IMF to draw down the outstanding USD 1.1 billion of the IMF Extended Fund Facility to get the much-needed funding. IMF advice has been taken on board, mostly to restore domestic and external sustainability.
The Pakistani government is working to strengthen the fiscal position through enhanced tax collection and efforts to restore the viability of the power and gas sector. Work is underway for the resolution of accumulated circular debt through the settlement of inter-enterprise liabilities and adjustments in energy pricing, while reducing losses of utility companies. Managing public expenditure restraints has been complex as demands for rescue and relief for flood affectees and efforts are now underway to rebuild the destroyed infrastructure.
Authorities are re-establishing the proper functioning of the FX market to revert to a flexible exchange rate mechanism. The government has agreed with all the prior conditions set by the Fund.
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