IMF Confirms $7 Billion Program for Pakistan Fully Financed with Strong Commitments
Initial 12-Month Funding Secured, Positive Outlook for Continued Support
Islamabad- (Mudassar Iqbal): A recent report from the International Monetary Fund (IMF) reveals that the institution has put its reputation at risk by approving a $7 billion bailout package for Pakistan, as any decision on whether to lend or withhold funds carries the possibility of the program derailing.
The report highlighted Pakistan’s high level of vulnerability due to its elevated debt, significant financing needs, and low reserves, which contribute to a high risk of sovereign stress. Despite these concerns, the IMF has currently deemed Pakistan’s debt as sustainable.
The IMF staff report noted that the lender faced difficult choices, potentially jeopardizing its credibility by moving forward with the $7 billion loan in light of significant risks.
“There are reputational risks for the IMF if it is seen as treating Pakistan differently from other nations that appear to receive less support,” the report stated.
On the other hand, the IMF pointed out that opting not to proceed with the new program also carries risks, as the new coalition government or other member nations might accuse the IMF of being unfair, particularly after the success of the standby arrangement.
There is a longstanding belief in Pakistan and internationally that the IMF views Pakistan through the lens of U.S. State Department priorities, similar to its approach toward Egypt and Ukraine. Some analysts argue that without debt restructuring, any future IMF program is likely to fail and miss its targets.
The IMF acknowledged the possibility of its program going off track, noting several significant risks associated with the new arrangement. Among these are elevated business risks, which include the potential for the program to falter and Pakistan’s security challenges, which could negatively affect foreign direct investment (FDI) and other factors.
The report forecasted net foreign direct investment to reach only 0.3% of Pakistan’s gross domestic product (GDP), or $1.3 billion, for the current fiscal year—an amount that is considered low in comparison to the efforts being undertaken by the Special Investment Facilitation Council.
The IMF said that its staff in Pakistan was facing “operational risks in relation to staff’s in-country activities”, adding that the IMF staff activities were closely coordinated in line with policies and supported by the United Nations Department for Safety and Security”. It pointed out that there were exceptionally high risks to the programme – notably from high public debt and gross financing needs, low gross reserves and socio-political factors, which could jeopardise policy implementation and erode repayment capacity and debt sustainability.
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The report further stated that Pakistan faces a high risk of sovereign stress, reflecting significant vulnerabilities stemming from elevated debt levels, substantial financing needs, and low reserve buffers. However, the IMF program aims to mitigate these risks through proposed fiscal adjustments, securing financial commitments from bilateral partners, and the banking system’s ability to roll over domestic debt.
The IMF also identified Pakistan’s medium-term debt sustainability risks as “high,” pointing to potential challenges such as uneven implementation of the program, political uncertainties, and ensuring sufficient access to multilateral and bilateral financing to meet the country’s considerable gross financing requirements.
Nevertheless, the IMF maintained that Pakistan’s public debt remains sustainable in the baseline scenario, provided there is strong and consistent implementation of IMF program policies. This would include ongoing fiscal consolidation during the current fiscal year and beyond, alongside a gradual recovery in economic growth in the coming years.
The IMF emphasized that timely disbursements from committed bilateral and multilateral partners are crucial in the upcoming period to ensure financial stability.
Pakistan’s external debt is predominantly owed to bilateral and multilateral creditors. The IMF said that the high share of short-term debt posed risks to debt sustainability and would require careful management. Domestic debt is mostly owed to local banks, increasing the sovereign-bank nexus. The IMF projected the public debt to decline gradually over the medium term. “The margin of error for policy slippages and delay in urgently needed structural reforms remains very small,” it cautioned.
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The IMF noted that the $7 billion program is fully funded, with solid commitments secured for the first 12 months and positive prospects beyond that.
For the current fiscal year, the report outlined that financing commitments include $16.8 billion in rollovers for short-term financing and an additional $2.1 billion in new commitments. These contributions come from key partners such as China, Saudi Arabia, the Asian Development Bank (ADB), and the Islamic Development Bank.
The IMF further stated that the government has obtained firm assurances from key bilateral partners that they will at least maintain their current exposure throughout the three-year program. This includes continuing to roll over short-term liabilities.
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