By Staff Reporter
KARACHI: The Economist Intelligence Unit (EIU) has stated that Pakistan is expected to default on its external debt obligations by early 2024 due to limited foreign-exchange reserves to service its external debt and the end of its IMF loan by the third quarter of 2023.
In its country report, the unit has criticized Pakistan’s poor policy choices over many years and mentioned that its economy is in a weaker position than other emerging Asian markets such as Bangladesh.
Even with ongoing reforms, economic growth is predicted to fall short of its potential in 2023-27.
The report also highlights that Pakistan needs to repay $77.5 billion in external debt between April 2023 and June 2026, while near-term debt-servicing will amount to $4.5 billion between April and June 2023. The country’s cash-strapped situation has raised investor concerns about its debt sustainability after the conclusion of the IMF package.
While the IMF’s extended fund facility (EFF) of $6.5 billion was supposed to end in June 2023, the disbursement of $2.6bn has been stalled due to delays in the implementation of reforms.
This has led the unit to believe that the package will not conclude within the stipulated time frame, resulting in an additional three-month extension.
The government will have to enact further unpopular measures as the national election approaches and budget for austerity in the upcoming fiscal year, 2023/24 (July-June).
The report also states that the ending of the EFF will prevent Pakistan from generating enough revenue, bilateral loans or foreign-exchange reserves to repay debt obligations, pay for imports and rebuild the economy following the devastating floods in 2022.
The government is not expected to opt for another IMF package in 2023, as the attendant requirements will be too difficult to implement as challenges to growth rise.
Instead, the government will rely on bilateral donors, bond markets and other multilaterals that may not impose such stringent conditions.
The report said the central bank, the State Bank of Pakistan (SBP), has indicated a proclivity to anchor inflationary expectations rather than focus on growth concerns.
It forecasts two more 100-basis-point rate increases by the third quarter of 2023, taking the policy rate to a historic high of 23 percent. Consumer price inflation is also expected to accelerate from 19.9 percent in 2022 to 30.3 percent in 2023, despite a moderation in global commodity prices.
However, a return to policy loosening before mid-2024 is unlikely due to inflationary pressures and IMF lending conditions.
The report states that after mid-2024, lower inflation, loss of domestic growth momentum, and a global shift towards looser policy settings will enable the SBP to gradually lower the policy rate back to 10 percent. In addition, the report expects the SBP to introduce further capital controls on US dollar transactions to slow the outflow of the currency in 2023.
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