Pakistan faces an external financing shortfall of nearly $4.5 billion, with concerns that the budget may exceed expectations by an additional Rs 1 trillion due to underestimated debt expenditures.
As per reports, both the financing gap and the reduced allocations for interest payments for the fiscal year 2023-24 can be attributed to unrealistic budgetary estimates. If these issues remain unresolved, they may pose difficulties during the first review of the $3 billion IMF program scheduled for November this year.
There are concerns that approximately $4.4 billion in foreign loans, out of a budgeted estimate of over $20 billion, may not materialize. This concern was raised at the highest levels within the finance ministry, prompting a series of meetings between the Economic Affairs Division and the Finance Division to bridge the funding gap.
The government had initially budgeted for $4.5 billion in loans from foreign commercial banks and an additional $1.5 billion through the issuance of Eurobonds. However, given Pakistan’s low credit rating and the global environment of higher interest rates, it is unlikely that nearly $3 billion in non-Chinese commercial loans can be secured.
The ministry remains hopeful about receiving $1 billion in Chinese commercial financing and another approximately $600 million from other sources. The prospects of raising $1.5 billion through bond issuance are considered minimal.
The government has been exploring alternative means of external financing, including increasing disbursements from multilateral creditors and raising funds through privatization.
Despite the government’s initial budget projection of $6.2 billion in inflows from multilateral and bilateral creditors for this fiscal year, only $293 million was received in July. Of the $5.1 billion in foreign loans received in July, $3 billion came from Saudi Arabia and the United Arab Emirates, while the IMF disbursed $1.2 billion. Loan disbursements under the IMF program have not yet commenced, but the government hopes they will start flowing shortly after IMF approval.
The World Bank is expected to approve a $350 million loan under the second Resilient Institutions for Sustainable Economy (RISE-II) program in the first week of October, despite Pakistan’s request for a $450 million loan being denied. The Asian Infrastructure Investment Bank (AIIB) has expressed willingness to provide $250 million in co-financing for RISE-II, after previously withholding it pending World Bank lending to Pakistan.
However, Pakistan’s eligibility for expensive IBRD financing has been hindered by its foreign exchange reserves falling below the required two-and-a-half months’ worth of import cover.