ISLAMABAD: Once Pakistan’s election winner Imran Khan forms a government, there will be little time to bask in his triumph: the country’s next prime minister will inherit a critical economic situation, and analysts say he must act fast.
The new leadership may be forced to seek a bailout from the International Monetary Fund (IMF) in the coming weeks.
Here are some questions and answers about Pakistan’s predicament:
Pakistan is on the verge of a balance-of-payments crisis, which threatens the stability of its currency and its ability to repay debts or pay for imports.
Its budget deficit has grown steadily over the past five years, from four percent to 10 percent of GDP.
Imports have skyrocketed, mainly due to rising oil prices. Between July 2017 and March, about 70 percent of the country’s import bill was for energy, machinery and metals, according to a State Bank of Pakistan report.
Meanwhile, exports — mainly textiles — have increased only slightly.
As a result, the country’s foreign currency reserves have declined to about $10.3 billion, according to recent figures given by the caretaker government.
This covers less than two months of imports, analysts say. Meanwhile, the rupee has been devalued four times since December, fueling inflation.
“We borrowed like crazy in the last four to five years, so it’s time to repay. But we don’t have... reserves,” former finance minister Hafeez Pasha told AFP.
Pakistan has gone to the IMF repeatedly since the late 1980s. The last time was in 2013 when Islamabad got a $6.6-billion loan to tackle a similar crisis.
Today, the country “needs at least $12 billion,” says Zeeshan Afzal, the director of Insight Securities, a Karachi-based consulting firm.
If approved, it would be Pakistan’s largest-ever bailout.
But it has not yet completed repayments on its previous loan, which could limit its current leeway with the Fund.
“Islamabad is betting on a maximum of $6.5 billion, hoping that this will have a virtuous effect on the confidence of the markets,” a senior diplomat, who asked to remain anonymous, told AFP.
Khan promised to create an “Islamic welfare state” on the campaign trail, but the plan — which would require big public spending on health and education — could be stillborn if the economy tanks.
“We will have weeks, not months” to act, Asad Umar, widely tipped to be the next finance minister, told the Financial Times on Thursday.
All options are on the table, he has tweeted, telling media that the new government is considering privatizing all state-owned companies, including the once-illustrious, now debt-laden Pakistan International Airlines.
But there are fears in Pakistan that the terms of any new IMF bailout will be stricter than in 2013, thanks to the tense relationship between Islamabad and Washington, one of the Fund’s biggest donors.
The US has warned that it will be watching closely to ensure Pakistan does not use IMF money to repay debts to China, which has poured billions into Pakistan for infrastructure projects under its Belt and Road Initiative.
Pakistani media have reported a recent $2 billion loan from China and another $4.5 billion from Saudi Arabia, though the transactions have not been confirmed. In any case, Saudi funds would only be used to buy oil.
In the face of a trade imbalance, Khan could try to reduce imports. But such measures have never borne fruit in a country with porous borders and numerous smuggling networks, especially for consumer goods — a major import item.
He could also seek to improve foreign investment. Khan has said his anti-graft campaign and clean government will improve the country’s image abroad, hopefully attracting investors who have been spooked by instability and structural issues in recent years.
The World Bank ranked Pakistan 147th out of 190 countries last year for its business climate.
Khan has vowed change on the home front too, saying his government will dramatically boost tax revenues. That is a major, perennial challenge: only a tiny percentage of those liable actually pay taxes in Pakistan.
A further massive devaluation of the rupee, which would deter imports and make exports cheaper and more competitive, could be considered.
But then “people would be in the streets,” predicts Pasha, the former finance minister.
“It would be the end of Imran Khan.”
Imran and the IMF: Pakistan’s bailout dilemma
Imran and the IMF: Pakistan’s bailout dilemma
Islamabad dismisses claims about paying up to 8 percent interest on foreign loans as ‘misleading’
- Pakistan has long relied on external loans to help bridge persistent gaps in public finances and foreign exchange reserves
- Pakistan’s total external debt, liabilities stand at $138 billion at an overall average cost of around 4 percent, ministry says
KARACHI: Pakistan’s finance ministry on Sunday dismissed as “misleading” claims that the country is paying up to 8 percent interest on external loans, saying the overall average cost of external public debt is approximately 4 percent.
Pakistan has long relied on external loans to help bridge persistent gaps in public finances and foreign exchange reserves, driven largely by a narrow tax base, chronic trade deficits, rising debt-servicing costs and repeated balance-of-payments pressures.
Over the decades, successive governments have turned to multilateral and bilateral lenders, including the International Monetary Fund, the World Bank and the Asian Development Bank, to support budgetary needs and shore up foreign exchange reserves.
The finance ministry on Sunday issued a clarification in response to a “recent press commentary” regarding the country’s external debt position and associated interest payments, and said the figures required contextual explanation to ensure accurate understanding of Pakistan’s external debt profile.
“Pakistan’s total external debt and liabilities currently stand at $138 billion. This figure, however, encompasses a broad range of obligations, including public and publicly guaranteed debt, debt of Public Sector Enterprises (both guaranteed and non-guaranteed), bank borrowings, private-sector external debt, and intercompany liabilities to direct investors. It is therefore important to distinguish this aggregate figure from External Public (Government) Debt, which amounts to approximately $92 billion,” it said.
“Of the total External Public Debt, nearly 75 percent comprises concessional and long-term financing obtained from multilateral institutions (excluding the IMF) and bilateral development partners. Only about 7 percent of this debt consists of commercial loans, while another 7 percent relates to long-term Eurobonds. In light of this composition, the claim that Pakistan is paying interest on external loans ‘up to 8 percent’ is misleading.
The overall average cost of External Public Debt is approximately 4 percent, reflecting the predominantly concessional nature of the borrowing portfolio.”
With respect to interest payments, public external debt interest outflows increased from $1.99 billion in Fiscal Year (FY) 2022 to $3.59 billion in FY2025, representing an increase of 80.4 percent, not 84 percent as reported. In absolute terms, interest payments rose by $1.60 billion over this period, not $1.67 billion, it said.
According to the State Bank of Pakistan’s records, Pakistan’s total debt servicing payments to specific creditors during the period under reference were as follows: the IMF received $1.50 billion, of which $580 million constituted interest; Naya Pakistan Certificates payments totaled $1.56 billion, including $94 million in interest; the Asian Development Bank received $1.54 billion, including $615 million in interest; the World Bank received $1.25 billion, including $419 million in interest; and external commercial loans amounted to nearly $3 billion, of which $327 million represented interest payments.
“While interest payments have increased in absolute terms, this rise cannot be attributed solely to an expansion in the debt stock,” the ministry said. “Although the overall debt stock has increased slightly since FY2022, the additional inflows have primarily originated from concessional multilateral sources and the IMF’s Extended Fund Facility (EFF) under the ongoing IMF-supported program.”
Pakistan secured a $7 billion IMF bailout in Sept. 2024 as part of Prime Minister Shehbaz Sharif’s efforts to stabilize the South Asian economy that narrowly averted a default in 2023. The government has since been making efforts to boost trade and bring in foreign investment to consolidate recovery.
“It is also important to note that the increase in interest payments reflects prevailing global interest rate dynamics. In response to the inflation surge of 2021–22, the US Federal Reserve raised the federal funds rate from 0.75-1.00 percent in May 2022 to 5.25–5.50 percent by July 2023. Although rates have since moderated to around 3.75 percent, they remain significantly higher than 2022 levels,” the finance ministry said.
“The government remains committed to prudent debt management, transparency, and the continued strengthening of Pakistan’s macroeconomic stability,” it added.
