The International Monetary Fund (IMF) has acknowledged reputational risks by approving a $7 billion loan for Pakistan, a decision that comes with significant concerns about the programme going off track due to Pakistan’s vulnerabilities.
The IMF’s latest report highlights that Pakistan’s risk of sovereign stress remains high. Elevated debt levels, large financing needs, and low reserves increase the country’s susceptibility. Despite these risks, the IMF has classified Pakistan’s debt as sustainable for now.
The report acknowledged long-standing perceptions that the IMF’s decisions regarding Pakistan may be influenced by political factors, similar to cases like Egypt and Ukraine. The IMF has also recognized that without restructuring Pakistan’s debt, future programmes may fall short of their targets.
The report admits that the IMF faced tough choices. Proceeding with the loan poses reputational risks, particularly as Pakistan is viewed differently compared to other nations. The fund also noted the risk of criticism for withholding support from the newly formed coalition government.
The IMF expressed concerns about the difficult security situation in Pakistan, which impacts foreign direct investment (FDI). The report forecasts net FDI at just 0.3% of GDP, equating to $1.3 billion for the current fiscal year—a figure considered too low given the country’s efforts to attract investment, particularly through the Special Investment Facilitation Council (SIFC).
The IMF also outlined significant risks to its staff operating in Pakistan, noting that their activities are coordinated with UN safety protocols. The programme itself is under threat from high public debt, massive financing needs, and low reserves, which could impede policy implementation and repayment capacity.
Despite these challenges, the IMF remains optimistic about Pakistan’s debt sustainability. It notes that fiscal adjustments and financial commitments from bilateral partners, along with Pakistan’s banking system rolling over domestic debt, will help mitigate the risks. The IMF also pointed out that public debt is expected to decline gradually over the medium term.
However, the lender warns that the margin for error is small, with delays in structural reforms posing a major risk. Timely disbursements from bilateral and multilateral creditors will be crucial for Pakistan’s fiscal stability in the months ahead.
The IMF emphasized that Pakistan’s external debt is largely owed to bilateral and multilateral creditors. The high share of short-term debt poses additional risks to sustainability. Nonetheless, the programme is fully financed for the first year, with firm commitments from key partners like China, Saudi Arabia, and international financial institutions.
Over the current fiscal year, $16.8 billion in short-term rollovers and $2.1 billion in additional financing have been secured. The IMF is relying on continued support from Pakistan’s bilateral partners to ensure the success of this programme.
