Tag: political tensions

Economic challenges await next govt as Pakistan votes

Pakistan is set to hold its national elections on Thursday, a crucial event for the country grappling with multiple crises.

As the new government prepares to take charge, it faces daunting challenges in stabilising the economy.

Last summer, Pakistan narrowly avoided a sovereign default through a last-minute $3 billion bailout from the International Monetary Fund (IMF).

However, this lifeline is set to end in March, and officials anticipate the need for a new, extended programme.

Negotiating this program swiftly is imperative for the incoming government, as the economy is burdened by record-high inflation and slow growth resulting from stringent reforms.

The country’s headline inflation stood at 28.3 per cent year-on-year in January, slightly lower than December’s 29.7 per cent. Despite government expectations, citizens are anxious for the new administration to address the soaring inflation that has significantly impacted their daily lives.

Moreover, recent increases in gas prices, with a 35.13 per cent hike for Sui Northern Gas Pipelines Limited (SNGPL) and 8.57 per cent for Sui Southern Gas Company Limited (SSGC), add to the economic challenges. The move, effective from January 1, 2024, is the second increase in gas prices this fiscal year.

In addition to rising gas prices, the cost of petrol and diesel has surged, with a notable increase of Rs13.55 per litre announced on February 1, 2024. This hike is attributed to the ongoing tensions in the Middle East, including Israel’s conflict with Gaza and Houthi attacks in the Red Sea.

Amid these economic hardships, the National Electric Power Regulatory Authority (NEPRA) has approved an increase in electricity tariffs for distribution companies (Discos) by Rs4.57 per unit for December 2023. This adjustment addresses the escalating fuel costs impacting the power sector.

The new government is also expected to address the exchange rate concerns as the Pakistani rupee struggles against the US dollar, currently standing at around Rs279.

The disparity has led to increased prices for essential commodities, further straining the population.

Adding to the complexity of the upcoming elections is the high political tension, with former prime minister Imran Khan describing a crackdown on him and his party.

Khan, who has been in jail since August, faces pending cases, including accusations of ordering violent attacks on military installations.

Despite his imprisonment, Khan maintains substantial popular support, and continued political unrest could jeopardise the stability needed for economic recovery and foreign investment.

As Pakistan stands at a critical juncture, the incoming government’s ability to navigate these challenges will determine the nation’s economic trajectory in the coming years.

February 8, 2024
IMF forecasts improved inflation, slower economic growth for Pakistan in FY24

The International Monetary Fund (IMF) has adjusted its economic projections for Pakistan, providing a comprehensive review in its latest report. The key highlights include a downward revision of inflation forecasts and a moderated economic growth projection for the fiscal year 2024 (FY24).

According to the IMF’s first review report, the inflation forecast for Pakistan has been revised down to an average of 24 per cent in FY24, showing a decline from the earlier projection of 25.9 per cent.

This adjustment is attributed to the easing of food and energy prices, although the November gas tariff increase is expected to contribute to headline inflation in the coming months. Despite this, gradual declines are anticipated due to lower core inflation and recent movements in commodity prices.

The year-end inflation is projected to be 18.5 per cent in FY24 and further decrease to 9 per cent in FY25, as outlined in the report.

Conversely, the IMF has lowered its economic growth projection for Pakistan to 2 per cent in FY24, down from the initial estimate of 2.5 per cent. The revision reflects weaker domestic demand despite positive base effects from flood recovery, particularly in agriculture and the textile sector.

The report emphasised that continued external challenges, along with tight fiscal and monetary policies, are expected to dampen consumption and private investment.

The current account deficit (CAD) for FY24 is forecasted at $5.6 billion (1.6 per cent of GDP), below the previously projected $6.5 billion in the SBA Request. The import rebound is expected to be more restrained due to weakened domestic demand, while exports and remittances are also anticipated to be subdued.

IMF staff anticipates the CAD to remain around 1.5 per cent of GDP over the medium term, reflecting efforts to rebuild reserves and a market-determined exchange rate consistent with sustainability.

Despite a notable improvement in market sentiment since June, the IMF pointed out that risks to debt sustainability remain acute. Large gross financing needs and limited external financing pose challenges, and the global lender stressed that any policy slippages or insufficient financing could jeopardise the path to debt sustainability.

Furthermore, the IMF highlighted that external financing risks are exceptionally high, and delays in the disbursement of planned financing from international financial institutions or bilateral partners could pose significant threats to the government’s programme, given limited buffers. This could lead to an increased reliance on expensive domestic financing, potentially crowding out private credit.

In addition to economic concerns, the IMF warned that political tensions ahead of the upcoming elections may impact policy decisions and reform implementation, adding another layer of uncertainty to Pakistan’s economic outlook.

The IMF concluded that while public debt could remain sustainable with decisive programme implementation and adequate financing, downside risks remain exceptionally high for the country, necessitating careful attention to policy measures and external support.

January 21, 2024
Pakistan rupee recovers by one paisa against US dollar

According to the State Bank of Pakistan (SBP), the Pakistani rupee (PKR) strengthened by Rs0.01 against the US dollar in the interbank market on Tuesday.

The local currency managed to recover and closed at Rs284.96.

Interbank closing #ExchangeRate for todayhttps://t.co/n6PeUqHJxq pic.twitter.com/TlY9yGvtsY

— SBP (@StateBank_Pak) May 16, 2023

In contrast, the dollar is being traded at Rs290 in the open market.

It’s worth noting that the rupee had reached a record low of Rs298.93 against the US dollar last week.

Market speculation suggests that the rupee’s gains were further supported by reduced demand for foreign currency, resulting from a significant import payment between May 9 and 11, coinciding with the period of heightened political drama in the country.

Reports indicate that the substantial dollar payment for imports had been arranged by the oil refineries. Oil imports constitute approximately one-fourth of the total import bill for a month.

Earlier, the rupee experienced a sharp decline of 4.71 per cent or Rs14.09 in just two days (May 10-11), hitting a record low of Rs298.93/$ due to worsening political turmoil and deteriorating law and order following the arrest of former Prime Minister Imran Khan. However, the rupee managed to recover some of its losses after Khan’s release on May 12, as ordered by the court.

May 16, 2023
Pakistan commits to IMF bailout deal without fuel subsidy scheme

Pakistan has informed the International Monetary Fund (IMF) that it will not be implementing a fuel subsidy programme during ongoing negotiations for a $1.1 billion bailout for the country.

The IMF has stated that it will continue to engage with the government on the loan, despite increasing political tensions.

Prime Minister had previously proposed a fuel subsidy scheme in March, which would charge higher rates to affluent consumers to subsidise prices for the poor who have been hit hard by inflation.

However, the government has now committed not to implement this programme in the current fiscal year or beyond. Instead, it will not introduce new tax exemptions and will allow a market-based exchange rate for the rupee currency.

The IMF has said that Pakistan needs significant additional financing to complete the long-delayed ninth review of its bailout package.

Obtaining commitments of significant additional financing is essential before the IMF approves the release of pending bailout funds that are crucial for Pakistan to resolve an acute balance of payments crisis.

According to Dawn, the State Bank of Pakistan’s reserves fell to $4.38 billon on Thursday, which is barely a month’s worth of imports. The IMF has emphasised that Pakistan faces stagflation, large financing needs, and has been affected by several shocks, including severe floods.

May 12, 2023
Pakistan could default after June as country fails to meet some IMF conditions

Pakistan is in the midst of a balance of payment crisis, and the stakes are high. Without the financial aid of the International Monetary Fund (IMF), the country faces the prospect of defaulting on its external payment obligations.

Unfortunately, reports say that the IMF is not convinced by the assurances given to them by Pakistan’s friendly countries.

Officials of the finance ministry, speaking anonymously, have confirmed that Pakistan has fulfilled several conditions set by the lender for the revival of the loan facility, and the staff-level agreement on the ninth review was supposed to be signed by February 9.

However, the delay in the IMF programme could have severe repercussions. The budget planning, which is expected to be tabled in the second week of June, is likely to be affected.

Moody’s Investor Service has warned that Pakistan may default if it does not receive a bailout from the IMF as its financing options beyond June are uncertain.

While Pakistan is expected to meet its external payments until the end of this fiscal year in June, its reserves are weak and without IMF support, it could default.

Pakistan is struggling to restart a stalled $6.5 billion bailout programme from the IMF due to the government’s failure to meet some loan conditions, and political tensions ahead of elections are adding to the risk of a delay in the loan.

An engagement with the IMF beyond June would support additional financing from other multilateral and bilateral partners, which could reduce default risk. Pakistan’s foreign-exchange reserves remain very low, standing at $4.5 billion, and sufficient to cover only about one month of imports.

S&P Global Ratings estimates that Pakistan’s gross external financing needs as a proportion of current-account receipts plus usable reserves will rise to 139.5 per cent in fiscal year 2024 from 133 per cent in 2023.

S&P analysts believe that an IMF programme would be a foundation for important fiscal policy reforms and that an agreement on the current review cycle could instill more confidence for other bilateral and multilateral lenders to Pakistan.

May 9, 2023