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06/19/2023 09:54:27 [BI] Bloomberg Intelligence

PAKISTAN INSIGHT: Default Odds Rise as IMF Sours on Bailout

By Ankur Shukla

(Bloomberg Economics) -- The International Monetary Fund’s criticism of Pakistan’s latest budget suggests chances
are rising that the lender will opt not to deliver long-awaited aid before its bailout program finishes at the end of
June. This would cause a severe dollar shortage in the first half of the fiscal year that starts in July, and possibly for
longer — significantly raising the odds of default. It would also raise the prospect of much lower growth, and higher
inflation and interest rates than we currently anticipate in fiscal 2024.

The IMF criticized the budget for not taking enough steps to broaden the tax base and for including a
tax amnesty. We had expected the IMF to focus more on the primary surplus targeted in the budget.
The country’s FX reserves currently stand at $4 billion. With at least around $900 million in debt that
must be repaid this month, the reserves will fall by June-end unless the IMF aid comes.
Between July-December, Pakistan must repay an additional $4 billion (which cannot be rolled over).
With FX reserves likely below $4 billion at the start of fiscal 2024, default seems highly likely.
Without any IMF program, the options for fresh external funding will likely be very limited.
Negotiations with the IMF on any new bailout aren’t likely to start until after elections in October.
Reaching an agreement will take time. We can safely assume that any actual aid disbursement from the
IMF under a new program will not happen until December.
In the meantime, the country will need to conserve dollars by limiting import purchases — and keeping a
current account balance in surplus— to have any hope of being able to meet its obligations. It will also
need to seek assistance from friendly nations to avert default in the first half of fiscal 2024.

FX Reserves Won’t Cover Debt Payments in Fiscal 2024

Source: Bloomberg EconomicsSource: Bloomberg Economics

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Bloomberg News Story

The economy will likely be hit hard if the IMF doesn’t deliver aid by June-end:

The authorities will have to keep import restrictions in place. The State Bank of Pakistan will also likely
raise rates above the current level of 21% to further curb demand for imports and conserve FX reserves.
Our base case currently is that the SBP will likely remain on hold through December (but that assumed
the IMF aid coming in by June-end).
Continued import restrictions and a weaker rupee would lead to higher inflation in fiscal 2024 than we
currently anticipate. We currently expect inflation to average 22%.
Higher borrowing costs and restrictions on imports of raw materials would hit production further. Higher
inflation would damp consumption. If IMF aid doesn’t come this month, we expect growth to be much
weaker in fiscal 2024 than our current forecast of 2.5%. We will review our projections soon.
Higher rates will also increase the government’s debt servicing costs. The government currently plans to
spend half of the fiscal 2024 budget on debt servicing.

Ankur Shukla is South Asia Economist for Bloomberg Economics in Mumbai. He previously worked as a Research Economist at
Societe Generale and as a Scenario Design Economist at HSBC and Credit Suisse.

Related ticker:
13347Z US (International Monetary Fund)

To contact the economist on this analysis:

Ankur Shukla in Mumbai at ashukla112@bloomberg.net

To contact the editor responsible for this analysis:

Jason Clenfield at jclenfield@bloomberg.net

This report may not be modified or altered in any way. The BLOOMBERG PROFESSIONAL service and BLOOMBERG Data are owned and distributed locally by Bloomberg Finance LP ("BFLP") and its
subsidiaries in all jurisdictions other than Argentina, Bermuda, China, India, Japan and Korea (the ("BFLP Countries"). BFLP is a wholly-owned subsidiary of Bloomberg LP ("BLP"). BLP provides BFLP
with all the global marketing and operational support and service for the Services and distributes the Services either directly or through a non-BFLP subsidiary in the BLP Countries. BFLP, BLP and their
affiliates do not provide investment advice, and nothing herein shall constitute an offer of financial instruments by BFLP, BLP or their affiliates.

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