Pakistan will face a vital evaluate of its financing amenities at a vital board assembly of the Worldwide Financial Fund (IMF) in Washington on Friday, because it plans to hunt funds for its cash-strapped and debt-ridden financial system. India goes to oppose the extra funding to Pakistan on the Board assembly, having already made its stance clear.
Tensions between India and Pakistan have soared, elevating issues globally about the potential of the nuclear-armed neighbours getting entangled in a chronic standard navy conflagration. The delicate state of Pakistan’s financial system, nevertheless, doesn’t lend itself effectively to an prolonged navy battle.
Pakistan is riddled with excessive international debt coupled with perilously low international change reserves, and has been grappling with an nearly perennial steadiness of fee disaster and excessive inflation in recent times. Islamabad’s exterior debt jumped to over $130 billion in 2024, over a fifth of which was estimated to be owned by its key ally China. In distinction, Pakistan’s foreign exchange reserves are pegged at a little bit over $15 billion, able to paying for almost three months of imports. Reserves stay low relative to funding wants, with over $22 billion of public exterior debt maturing in FY25, together with almost $13 billion in bilateral deposits, as per Fitch.
IMF bailout
With elevated debt ranges and low reserve buffers, Islamabad had earlier managed to get a bailout package deal from the IMF in September 2024 with the approval of a $7-billion mortgage, following which its financial system has proven some early indicators of a restoration from the brink of a collapse. As per the most recent South Asia Growth Replace launched in April by the IMF, Pakistan’s financial system has been recovering from a mix of pure disasters, exterior pressures, and inflation. Whereas inflation has slowed extra rapidly than anticipated together with robust imports of capital items and excessive shopper confidence suggesting a pickup in non-public sector progress, the incoming knowledge on financial exercise have been weaker than anticipated, the IMF mentioned. Financial progress of Pakistan is projected to rise to three.1 per cent within the monetary yr 2025-26 from 2.7 per cent within the monetary yr 2024-25, 2.5 per cent in 2023-24 and a contraction of 0.2 per cent in 2022-23.
The continued 37-month lengthy Prolonged Fund Facility programme of the IMF consists of six opinions over the span of the bailout, and the discharge of the following tranche of roughly $1 billion can be contingent upon the success of the efficiency evaluate. The IMF board is assembly Friday to evaluate the financing amenities prolonged to Pakistan, the place it should face stiff opposition from India for diversion of funds in direction of terror financing within the backdrop of the Pahalgam terror assault on April 22.
The opposite multilateral financial institution, the World Financial institution, additionally expects Pakistan’s financial exercise to select up in FY26 (3.2 per cent) and FY27 (3.5 per cent). Nonetheless, it has additionally flagged that Pakistan’s progress will probably stay constrained by tight macroeconomic insurance policies centered on rebuilding fiscal and exterior buffers and mitigating dangers to financial imbalances.
Story continues under this advert
Potential macroeconomic coverage slippages — pushed by pressures to ease insurance policies — together with geopolitical shocks to commodity costs, tightening world monetary circumstances, or rising protectionism may undermine the “hard-won macroeconomic stability”, the IMF had identified in its assertion in March this yr after the primary staff-level evaluate of the mortgage facility prolonged to Pakistan.
Funding from different multilateral establishments just like the World Financial institution and the Asian Growth Financial institution can also be essential for Pakistan’s financial revival and securing it will be a problem as India steps up its ante by searching for assist from all MDBs.
When the bailout package deal was secured by Pakistan final yr, the IMF in its report in October had assessed the general threat of sovereign stress for the nation as “excessive”, saying that it mirrored “a excessive degree of vulnerability from elevated debt and gross financing wants and low reserve buffers”.
“However the brand new authorities’s intent to deepen reforms underneath a brand new Fund-supported program, political uncertainty stays important, and pressures for relieving insurance policies and offering tax concessions and subsidies are robust. A resurgence in political or social tensions may weigh on coverage and reform implementation. Coverage slippages, together with significantly on wanted income measures, along with decrease exterior financing, may undermine the slender path to debt sustainability, given the excessive degree of gross financing wants, and place strain on the change price and on banks to finance the federal government,” the IMF report had mentioned.
Story continues under this advert
In such a dire state of affairs, a money-guzzling battle with India needs to be the very last thing on a beleaguered Islamabad’s thoughts, because it must basically fund any long-drawn-out battle with borrowed cash. And whereas a chronic navy battle with Pakistan is sure to affect India to some extent, the world’s fastest-growing main financial system seems way more outfitted to deal with the financial affect in such a state of affairs. These essential factors have been underscored repeatedly by specialists and analysts.
The truth is, simply two days earlier than Operation Sindoor, Moody’s Rankings cautioned that “sustained escalation in tensions with India would probably weigh on Pakistan’s progress and hamper the federal government’s ongoing fiscal consolidation, setting again Pakistan’s progress in reaching macroeconomic stability”. The worldwide scores company added {that a} persistent enhance in tensions with India may additionally impair Pakistan’s entry to exterior financing and strain the nation’s foreign exchange reserves, which stay “effectively under what’s required to fulfill its exterior debt fee wants for the following few years”.
As for the affect on India, Moody’s mentioned: “Comparatively, the macroeconomic circumstances in India can be steady, bolstered by moderating however nonetheless excessive ranges of progress amid robust public funding and wholesome non-public consumption. In a state of affairs of sustained escalation in localized tensions, we don’t count on main disruptions to India’s financial exercise as a result of it has minimal financial relations with Pakistan”. The scores company, nevertheless, added that larger defence spending in such an eventuality would doubtlessly weigh on New Delhi’s fiscal energy and gradual its fiscal consolidation.
Specialists and multilateral establishments have repeatedly flagged main structural issues and different dangers plaguing the nation’s financial system which have largely remained unaddressed. These embrace excessive fiscal and present account deficits, political instability, low agriculture and industrial productiveness, protectionist commerce insurance policies, heavy authorities interference in enterprise, a big and inefficient public sector, a financially unsustainable and import-dependent vitality sector, weak exports, and a small taxpayer base, amongst others. Pure calamities like widespread floods have additionally exacerbated Pakistan’s financial woes in recent times.
Story continues under this advert
Protracted hostility and battle with India additionally poses important dangers for Pakistan’s labour-intensive agriculture sector, Yousuf Nazar, former head of Citigroup’s rising markets investments, famous in his current opinion piece in Monetary Instances.
“Pakistan’s actual financial system, significantly agriculture, would additionally undergo. India’s suspension of the 1960 Indus Waters Treaty sends a destabilising sign. Agriculture stays the spine of Pakistan’s financial system, using almost 40 per cent of its labour pressure. Mixed with ongoing political instability and the lingering results of the 2022 floods, the nation is ill-prepared for an additional main shock. A single disaster may set off financial collapse and mass struggling. For Islamabad, avoiding important escalation might be a query of survival,” Nazar wrote in FT.
“Even when a full-scale battle seems unlikely, the potential for restricted hostilities — frequent within the fraught historical past of this rivalry — stays excessive. And quick lived escalations can nonetheless impose outsize financial and human prices, significantly on a rustic as weak as Pakistan,” Nazar wrote.
Power constraints
Whereas Pakistan has made some progress in direction of macroeconomic stabilisation, the financial hardships of the previous few years have additionally led to an increase in poverty, as famous by the World Financial institution in its overview in March for the nation. There are issues on the vitality entrance too, with the nation battling an electrical energy disaster and issues in imports of vitality feedstock, which is crucial for companies to function and family consumption.
Story continues under this advert
“Amid the COVID-19 pandemic, the catastrophic 2022 floods and macroeconomic volatility, poverty has elevated. The estimated lower-middle earnings poverty price stood at 42.3 per cent for FY24 (2023-24) with an extra 2.6 million Pakistanis falling under the poverty line from the yr earlier than,” the World Financial institution mentioned.
Among the many key causes behind Pakistan’s financial distress is the nation’s import-driven vitality coverage, which has hit its foreign exchange reserves, stoked inflation, and compelled it to borrow closely, significantly at instances of worldwide vitality worth shocks. As famous in a March 2023 report by the Federation of Pakistan Chambers of Commerce & Trade on the affect of IMF programmes on Pakistan, 15 of the 23 IMF programmes for Pakistan until then had been sought by Islamabad through the numerous world oil crises through the years.
Furthermore, with Pakistan’s home fossil gasoline reserves depleting, reliance on vitality imports has solely been rising. The nation primarily will depend on West Asian international locations like Saudi Arabia and the United Arab Emirates for crude oil imports, and on Qatar for pure gasoline. Pakistan can also be a heavy importer of refined petroleum fuels, given the nation’s restricted home refining capability. The nation has additionally been grappling with smuggling of cheaper petroleum fuels from throughout the border in Iran, which takes a toll on the home oil and gasoline sector and hits Pakistani authorities income as effectively.
With a major share of vitality being generated in Pakistan utilizing pricey imported fuels, and with home inefficiencies, mismanagement, and excessive subsidies, the round debt downside within the nation’s energy sector has intensified through the years, accentuating the nation’s vitality disaster. The IMF famous that an unreliable vitality provide and excessive and unpredictable prices have negatively impacted financial exercise and growth in Pakistan, and the nation’s vitality sector has turn into a “main level of macro-fiscal threat as round debt spiked over 2013-21 for energy and 2020-23 for gasoline”.