IMF Country Report Highlights – Pakistan
Higher Interest Rates, Floating Exchange Rate, Power Sector Reforms
The IMF issued its latest country report on Pakistan with details of the latest 9-month standby agreement of USD 3bn.
● IMF staff have emphasized that SBP will have to continue monetary tightening to reduce inflation expectations and expect inflation to persist on the back of exchange rate adjustments during the year. Massive injections through Open Market Operations to keep interest rates in check resulted in loose monetary conditions. To recall, total OMO exposure increased from PKR 4trn at the end of June to 2023 to approximately PKR 8trn currently.
● Return to a market-based exchange rate and a permanent ending of administrative controls would allow the exchange rate to act as a shock absorber. Moreover, the ending of administrative controls which have caused major disruptions especially in the auto and appliance sector would allow these companies to operate smoothly. To recall, administrative measures in one form or the other have negatively impacted the operations of companies since May 2022. The SBP has recently withdrawn a circular issued to banks to prioritize certain imports.
● Power sector reforms remain in focus and staff has stressed timely and regular tariff adjustments to recover costs along with better targeting of power subsidies. The increased focus and steps taken to secure the program on resolution of circular debt would lead to better cash flows for companies in the energy chain and lead to higher dividends.
● While Pakistan’s public debt is assessed as sustainable, the situation could quickly worsen if implementation of policies agreed to secure the SBA are not continued. We do not see the risk of any local debt restructuring at the moment. The IMF has also reduced its estimate for gross external financing needs on the back of a lower Current Account Deficit (CAD) target. The IMF expects public debt as a percentage of GDP to gradually decline to 63.1% by 2028 from 77.4% in 2023.
● Pakistan is highly vulnerable to natural disasters due to its diverse climates and topography. Climate change has intensified these disasters, particularly hydrologicalevents, resulting in significant human and material losses. To address this, Pakistan needs to prioritize climate resilience alongside mitigation efforts. Climate models predict that Pakistan’s weather patterns will become more extreme, with higher temperatures and variable precipitation. Accelerated adaptation measures are crucial, as the country faces the risk of losing Himalayan ice and increased water flow.
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