Pakistan’s politics seen key to deliver on new IMF aid programme
- The government’s ability to stay on track with reforms will be tested ahead of a coming national election that will need to go smoothly, analysts caution
- The fresh IMF support can assuage concerns about Pakistan’s ability to keep making payments and help other investors re-engage with the country
The political situation has been volatile in recent weeks, adding to more than a year of upheavals since the ouster of former prime minister Imran Khan in April 2022. Violence erupted across the country in May after the arrest of Khan, who has been facing more than 100 cases ranging from corruption to murder in various courts.
As recently as last August, Islamabad had won IMF staff approval for a US$1.1 billion loan, only to have the bailout programme halted over failure to meet some conditions. Prime Minister Shehbaz Sharif was able to close a new deal after multiple hour-long phone calls and several meetings with IMF Managing Director Kristalina Georgieva.
“Under duress, the government has shown reforms can be initiated – now the question is whether they will stay on track and continue to systematically work through” the issues, Aqeel said.
The nine-month, so-called standby arrangement reached on Thursday will need approval by the IMF executive board, with a vote expected in mid-July.
With some US$23 billion of external debt obligations coming due in the financial year starting July – more than six times the nation’s foreign-exchange reserves – the fresh IMF support can assuage concerns about Pakistan’s ability to keep making payments.
02:24
Pakistan hit by cost-of-living crisis as inflation skyrockets to nearly 40% year-on-year
Pakistan is going through its worst economic crisis, with record interest rates and inflation making it harder for people to buy fuel and put food on the table.
The government in June proposed a budget plan to shrink the fiscal deficit in part through tax hikes. But that will test the administration’s already frayed popularity ahead of a national election due no later than October.
“I don’t think the government is in a position right now to have serious reforms,” said Ruchir Desai, a co-fund manager at the AFC Asia Frontier Fund. That may indeed be why Pakistan had gone for a standby arrangement, he said, adding that ultimately a longer-term agreement with the IMF would be needed.
For now, the deal would be “of comfort to investors”, Desai said. With Pakistani stocks so cheaply valued – the KSE-100 Index is trading at just four times earnings, by his tally – “I think the market will rally”.
But for a sustained gain beyond the next couple of months, the coming elections would need to go smoothly, Desai cautioned.
Markets were closed on Friday in Pakistan, and are scheduled to reopen on Monday. Pakistan’s dollar bonds due in 2024 surged on Friday.
The IMF deal could help encourage other creditors to engage with Pakistan, adding to the country’s breathing space, according to Mattias Martinsson, chief investment officer at Stockholm-based frontier market investors Tundra Fonder AB.
Pakistan expects Saudi Arabia and the United Arab Emirates to give US$3 billion in fresh loans, and more in investments. It is also trying to materialise about US$10 billion committed in pledges at a donor conference in Geneva after devastating floods last year.
“From our perspective, the market has already factored in a default, so a certain positive reaction is likely,” Martinsson said. “Our main apprehension, however, continues to revolve around the uncertain political situation,” looking out later this year, he said.
