London
CNN
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The political unrest that has engulfed Pakistan since former Prime Minister Imran Khan was arrested earlier this week will complicate efforts to secure a financial lifeline from the International Monetary Fund and aggravate the country. economic crisis.
Growth has stagnated and inflation has soared in the South Asian country of 220 million over the past year. With the sharp depreciation of the Pakistani rupee and dwindling foreign currency reserves, the country has struggled to import essential goods such as food, leading to deadly stampedes at distribution centers. Fears that Pakistan could default on its debt have been simmering for months.
Now, as nationwide protests and violent clashes sweep the country following Khan’s dramatic arrest on corruption charges, the country’s ability to secure much-needed financial aid has been thrown into even greater doubt. Khan was released on bail Friday, but told CNN he expected to be arrested again.
“It makes things quite complicated,” said Sergi Lanau, director of emerging markets strategy at Oxford Economics. “This is very bad news [in] a situation that was already very hard”.
The government can probably be confused in the immediate term, thanks to the forbearance of foreign creditors like China, but the risk of default will increase unless a deal with the IMF can be reached soon.
Paramilitary troops entered a court in Islamabad on Tuesday to arrest Khan, who was ousted from power last year. His arrest, which the Supreme Court considered illegal On Thursday, he unleashed an outpouring of anger. Supporters have stormed buildings and clashed with security forces. At least eight people have been killed and hundreds injured, according to government officials.
A spokesman for the International Monetary Fund, which has been in talks with Pakistan’s government to restart a $6.5 billion assistance program, said Thursday that negotiators are “very engaged” with Pakistan’s authorities, which are “facing a very difficult situation.”
However, investors are skeptical Pakistan and the IMF may reach a deal to unlock much-needed funds, with the volatile political environment adding to uncertainty ahead of elections in the fall.
The political turmoil in Pakistan comes as the country grapples with a serious economic perspective.
Growth has slowed to a crawl, while a serious dollar deficit hampers imports. Food shortages are contributing to rising prices. Inflation reached an annual rate of 36.4% in April, with the cost of food rising by almost 47% in urban areas and more than 52% in rural regions.
The central bank’s foreign reserves of about $4.4 billion are enough to cover about a month’s worth of imports, according to Tahir Abbas, director of research at Arif Habib, a financial firm in Karachi.
What is known as a “balance of payments” crisis is eroding living standards in a country still reeling from last year’s devastating floods. It could “reverse the poverty gains made in the past two decades and further reduce the incomes of already poor households,” the World Bank warned last month.
Pakistan’s ability to maintain its debt payments has also been called into question. Ratings agency Moody’s downgraded the country’s credit rating in late February, noting that foreign exchange reserves were “well below what is needed to cover its import needs and external debt obligations in the immediate and medium term.” .
Widespread protests could amplify the pain. Authorities blocked mobile internet services this week to try to quell the chaos, a move GSMA, an industry group representing mobile network operators, criticized as damaging to citizens and businesses.
“The political uncertainty and the crisis situation included [protests] they are dampening the already struggling economy,” Abbas said.
The government has been working with the International Monetary Fund to resume a funding program that has been stalled since November and expires in June. Julie Kozak, the IMF’s director of communications, said Thursday that the country has “very large financing needs.”
“Funding already committed by Pakistan’s external partners is welcome, however, significant additional funding is essential to support the authorities’ policy efforts,” Kozak said.
But with elections looming and public anger rising, investors think reforms requested by the IMF to improve the country’s fiscal position are unlikely to be agreed as they would contribute to economic difficulties in short term.
The rupee hit an all-time low of nearly 300 to the US dollar this week. Meanwhile, Pakistan’s government dollar bonds have traded at distressed prices.
“Cutting spending and raising taxes is not easy at all,” Lanau said. “These are things that, in view of the elections, are not pleasant for anyone.”
Gerwin Bell, chief Asia economist at PGIM Fixed Income, which holds Pakistan bonds, said the firm’s “long-standing” view is that “the government would not be able to provide the necessary guarantees to the IMF.” .
“Current political events only reinforce our view,” Bell added.
Prime Minister Shehbaz Sharif said in a televised speech on Friday that the country’s economic problems stem from his predecessor.
“As you know, the currency is going through difficult times,” he said. “The challenges we have inherited are contributing enormously to exacerbating the situation.”
He continued: “The previous government violated an agreement with the IMF and we are trying to repair that.”
Without the IMF’s help, which is seen as essential to unlocking financing from other sources, the risks that Pakistan could default on its debt increase. But there is still a chance that the country will avoid this outcome.
“We don’t think the default risk is very high,” Bell said. “Private sector bond debt is very small and major bilateral creditors have so far been willing to roll over maturities,” he added, noting that China and the Gulf economies “are not eager to trigger defaults.”
However, the threat could hang over the country for some time. Abbas said that while the country “can manage” until July, and possibly until August, “it will be absolutely crucial to resume the IMF program or embark on a larger IMF program to manage the crisis in the foreign sector”.
Moody’s has estimated Pakistan’s external financing needs for fiscal year 2024, which begins in July and runs through next June, to be between $35 billion and $36 billion.
In February, the ratings agency said about 50 percent of government revenue will have to go to debt interest payments “in the coming years,” exacerbating economic problems and stoking political discontent.
“A significant portion of revenue earmarked for interest payments will increasingly constrain the government’s ability to service its debt while meeting the population’s essential social spending needs,” Moody’s wrote in its report.
— Sophia Saifi contributed reporting.
