IMF warns of huge downside risks to Pakistan’s economy

The International Monetary Fund (IMF) has issued a stern warning about Pakistan’s economic future, highlighting exceptionally high downside risks in its latest report.

The report, released ahead of talks between the Pakistani government and the IMF on a new long-term programme, outlines concerns about the country’s stability and the challenges it faces, Dawn reported.

According to the IMF staff report, “Downside risks remain exceptionally high. While the new government has indicated its intention to continue SBA (standby arrangement) policies, political uncertainty remains significant.

It warns that this uncertainty could have a profound impact on policymaking, especially given the high cost of living and other political complexities.

The IMF also warned that policy slippage, combined with a reduction in external financing, could derail Pakistan’s debt sustainability progress and put pressure on the exchange rate.

Additionally, external stability is threatened by factors such as higher commodity prices, shipping disruptions and tighter global financial conditions, all of which could exacerbate the country’s fiscal challenges, Dawn reported.

Emphasizing the urgency of the situation, the IMF stresses the importance of timely disbursement of subsequent external financing of the programme. While Pakistan recently completed a short-term program worth US$3 billion, Prime Minister Shehbaz Sharif has stressed the need for a new, long-term arrangement to address the country’s current economic issues.

Last summer, Pakistan narrowly avoided default, and since then, the economy has stabilized, with inflation falling from a record high of 38 percent in May to about 17 percent in April. However, significant challenges remain, including a high fiscal deficit and stagnant growth, which is projected to be around 2 percent this year compared to negative growth last year.

To address these challenges, Pakistan is expected to seek at least US$6 billion from the IMF and request additional financing from the fund under the Resilience and Sustainability Trust, Dawn reported.