Within ten days of the cabinet formation by the new government led by Pakistan Muslim League-Nawaz (PML-N), Pakistan reached a staff-level agreement with the IMF on the second and final review of the $3 billion bailout on 20 March 2024. As a result of this agreement, the country will receive $1.1 billion after approval from the Fund’s executive board.
Pakistan’s economic and financial position has improved in the months since the first review, with growth and confidence continuing to recover on the back of prudent policy management and the resumption of inflows from multilateral and bilateral partners.
Last year in June 2023, the IMF executive board approved a nine-month arrangement with Pakistan’s government led by Prime Minister Shehbaz Sharif to support its economic stabilisation programme. The approval had allowed for an immediate disbursement of $1.2 billion, with the rest to be phased over the programme’s duration subject to two quarterly reviews. The final review for the last tranche of $1.1 billion follows the disbursement of $700 million in January 2024 during the interim government.
The fruits of the hard economic decisions taken by Shehbaz Sharif’s government started appearing in FY-2023 and were acknowledged by the IMF while executing the staff-level agreement in June 2023.
Impending default situation
In FY-2022, the current account deficit left by the outgoing Pakistan Tehreek-e-Insaf (PTI) government reached $17.481 billion, driving the country to the brink of default. An overheated economy allowed unimpeded imports of $84.485 billion in FY-2022 with a historic high trade gap of $44.890 billion. At the time, foreign exchange reserves held by the State Bank of Pakistan were just $9.814 billion, barely enough to cover five weeks’ worth of imports.
The coalition government led by Mian Shehbaz Sharif took up one of the toughest jobs at the height of the economic crisis, and spearheaded efforts to save Pakistan from default. Under his stewardship, the government managed to secure the IMF programme in 2022 and service foreign debt liabilities of $22 billion in FY-2022. The consequences of this economic crisis were dire: hyperinflation, a significant devaluation of the rupee, a near-halt in imports, and the potential for social and political unrest.
In the span of 16 months, Shehbaz Sharif’s coalition government undertook major structural reforms, like tightening monetary policy to control inflation, broadening the tax base, reducing subsidies pressure on the exchequer, maintaining flexible foreign exchange market rates, and curbing dollar smuggling.
Achievements
The fruits of the hard economic decisions taken by Shehbaz Sharif’s government started appearing in FY-2023 and were acknowledged by the IMF while executing the staff-level agreement in June 2023.
As of June 2023, the country’s trade gap narrowed by 44.5 per cent to $24.924 billion from $44.890 billion in FY-2022, bolstering the government’s efforts to substantially reduce the current account deficit by 87 per cent to $2.235 billion from $17.481 billion in FY-2022.
Furthermore, the July 2023-February 2024 trade deficit dropped by 18.7 per cent ($15.433 billion) and the current account deficit to just $999 million.
Pakistan’s inflation pace eased in March 2024 for the third month consecutively to the lowest in almost two years, 20.68 per cent, after facing an all-time high inflation of 37.97 in May 2023.
Pakistan’s inflation pace eased in March 2024 for the third month consecutively to the lowest in almost two years, 20.68 per cent, after facing an all-time high inflation of 37.97 in May 2023.
In April 2024, Pakistan’s real interest rate turned positive on a spot basis after 37 months, potentially paving the way for the central bank to implement the first cut in its policy rate during the upcoming late April 2024 monetary policy session.
Pakistan Stock Exchange (PSX) demonstrated exceptional performance and surged to a record high above 67,000 points during March 2024. The positive atmosphere stemmed from the recent record-breaking performance of the PSX and FTSE Russell’s decision to retain Pakistan in “secondary emerging markets” for the next six months. The stock market’s performance is the barometer of government policies, and the current government is playing its role in turning the PSX into a real engine of capital growth and viable investment.
The Pakistani rupee has remained largely stable and cumulatively increased 10.49 per cent in value in the past six and a half months, continuously building confidence in the Pakistan market. Constructive measures taken by the federal government and the State Bank of Pakistan to curb currency smuggling, stifle the black market and local hoarding are stabilising the currency rate.
Maintaining moderate economic growth with the enforcement of structural reforms has contributed to averting sovereign default and stabilising the economic macro indicators of Pakistan.
The writer is a corporate financial specialist.
