Pakistan’s foreign exchange reserves have fallen below $10 billion, threatening to turn into a full-blown economic crisis unless policymakers secure a loan from the International Monetary Fund.
The stock fell $366 million in the week ended May 27 to $9.72 billion, the central bank said in a statement on its website on Thursday. That’s about a 50% drop from August and enough to pay for less than two months of imports.
The dollar shortage could worsen as the country forecasts its trade deficit will hit a record $45 billion in the year ending June. Authorities raised fuel and electricity prices, a key condition to unlock the remaining $3 billion of an existing loan from the multilateral lender.
In addition to raising fuel prices, Pakistan will need to make further fiscal adjustments to reduce the fiscal 2023 budget deficit to secure the IMF loan, said Raphael Mok, head of Asia country risk at Fitch Solutions. in Singapore. That will likely involve measures to boost tax collection and reduce subsidies and capital spending, he said.
“The growing current account deficit is also a source of concern for policymakers and IMF officials, for whom the government has announced a ban on more than 30 luxury items, including cars,” Mok said.
A $2.3 billion deposit from Chinese banks is expected to bolster Pakistan’s foreign exchange reserves, the country’s Finance Minister Miftah Ismail said in a Twitter post on Thursday, adding that the terms and conditions of the refinancing had been agreed. agreed.
Still, Pakistan’s use of these funds may be limited because the terms and conditions are unclear, Mok said.
The cost of insuring Pakistan’s debt against the risk of default remains high after hitting its highest level in more than a decade last week. The national currency pared some losses after hitting a record low of 202 to the dollar last week, but is still down about 10% this year, according to data compiled by Bloomberg.
Pakistan’s inflation rate has accelerated to a more than two-year high on rising food and fuel prices, and stocks have fallen around 5% this year.
Moody’s downgrades Pakistan’s outlook to negative due to IMF delay
Moody’s Investors Service lowered its outlook on Pakistan from negative to stable, citing financial concerns that include a delay in the International Monetary Fund’s bailout stimulus.
The rating agency’s decision is prompted by Pakistan’s heightened external vulnerability risk and uncertainty about its ability to secure additional external financing to meet its needs, Moody’s said in a statement. He left the credit rating for the nation at B3, an undesirable rating.
Pakistan has seen its finances deteriorate amid heightened global uncertainty and political unrest. It is seeking to strike a deal with the multilateral lender to access the remaining $3 billion of an existing loan and unlock funds from other sources to avoid a default. The country needs about $36 billion in funding for the fiscal year beginning in July.
“Pakistan’s risk of external vulnerability has been amplified by rising inflation, which is putting downward pressure on the current account, currency and – already slim – foreign exchange reserves, especially in the context of heightened political and social risk,” the statement said.
Pakistan’s headline inflation hit its highest level in more than two years in May, while its currency has fallen around 10% this year, making it Asia’s worst-performing currency. Its foreign exchange reserves more than halved to about $10 billion last year, enough to pay for less than two months of imports.
Pakistan’s weak institutions and strong governance add uncertainty about the future direction of macroeconomic policy, including whether the country will complete the current IMF program, Moody’s said.
Pakistani Prime Minister Shehbaz Sharif’s coalition government came to power in April after ousting Imran Khan in a vote. It has been under pressure ever since, with Khan staging protests in different cities and drawing large crowds amid public anger over Asia’s second-fastest inflation. The new government’s recent decision to raise fuel prices, as part of efforts to meet conditions set by the International Monetary Fund to revive a stalled aid package, could further fuel price gains.