Gaza Conflict and Election Woes Pose Economic Risks for Pakistan: IMF

Pakistan’s economy is facing growing challenges due to the escalating conflict in Gaza and the political instability ahead of the next elections, according to the International Monetary Fund (IMF).

The IMF, which released its staff report on Pakistan on Saturday, said that the geopolitical tensions in the Middle East could affect the currency rate and the external stability of the country, which is already struggling with low reserves and high debt.

The IMF also said that the pre-election environment could hamper the implementation of the reforms and policies agreed under the IMF’s programme, which aims to restore fiscal and monetary discipline, strengthen institutions, and promote growth.

The IMF praised the caretaker government for its steadfast implementation of the programme, which has improved market sentiment and eased external pressures since June. However, it cautioned that the downside risks remain exceptionally high and the medium-term challenges are acute.

The IMF urged Pakistan to maintain a market-determined exchange rate, which is critical to buffer external shocks, rebuild the central bank’s foreign exchange reserves, and support growth. It also advised Pakistan to eliminate the existing exchange restriction and the multiple currency practice as soon as possible.

The IMF said that Pakistan has agreed to further increase gas prices by February 15, 2024, as part of the structural benchmarks of the programme. It also said that Pakistan has agreed to develop a plan to strengthen internal control systems in lending operations, in line with the recommendations from the 2023 safeguards assessment.

However, the IMF noted that Pakistan has failed to implement the average premium between the interbank and open market rate, which should be no more than 1.25% during any consecutive five business-day period.

The IMF warned that Pakistan’s public debt remains unsustainable, despite the decisive implementation of programme policies and the adequate multilateral and bilateral financing. It said that any policy slippages, insufficient financing, elevated gross financing needs, the realisation of contingent liabilities, and downward risks to the baseline could all undermine the narrow path to debt sustainability.

The IMF also said that Pakistan’s capacity to repay the Fund is subject to significant risks and critically dependent on policy implementation and timely external financing. The Fund’s exposure to Pakistan reaches SDR 5,972 million (or 294 per cent of quota and about 103 per cent of projected gross reserves at end of January 2024) with purchases linked to the review.

The IMF stressed the need for continued vigilance to ensure financial stability, including ensuring compliance with the minimum capital requirements for all banks and microfinance banks, or exiting the market. It also urged Pakistan to pass the legal reform of the crisis management framework, which is crucial to deal with weak institutions.

The IMF said that the current programme has provided a much-needed respite for Pakistan, but the current policy efforts need to continue to address the medium-term challenges sustainably. It also said that uncertainty about global economic and financial conditions amid several successive shocks adds to the risks.

The IMF’s report comes at a time when Pakistan is facing a humanitarian crisis due to the influx of refugees from Afghanistan, where the Taliban have taken over the country after the withdrawal of US troops. Pakistan is also facing pressure from the international community to play a constructive role in the region and to curb terrorism and extremism.

The IMF’s programme for Pakistan, which was approved in July 2023, provides $6 billion over 39 months to support the country’s economic reform agenda. The programme aims to reduce the fiscal and current account deficits, improve the business environment, strengthen social protection, and enhance transparency and governance.

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