Pakistan in the midst of a perfect storm

At present Pakistan is plagued by policy paralysis and the situation is likely to get worse before getting better. The continuation of the IMF program remains critical.

Unfortunately, analysts do not see much of an improvement. Pakistan seems to be caught in the midst of a perfect storm of adversities with spiraling inflation, falling reserves and external vulnerabilities.

Politics appears to be a nightmare because the current set up seems incapable of making the right decisions. The logjam in politics continues to persist, which is prolonging policy inaction, delaying the 9th IMF review and taking the situation from bad to worse.

Given the urgent need for action to revive the IMF program and procure fresh bilateral funding, the possibility of a technocrat-led government has made its way into the discourse. Such a setup would need very strong backing and slack by political parties, which appears to be missing.

Balance of Payments crisis is getting worse. Pakistan barely managed to meet the US$ one billion Sukuk maturity in early December 2022, but confidence on meeting external debt obligations in 2023 is being shattered with foreign exchange reserves slipping below US$ 6 billion.

There is little conviction also that the donors conference scheduled for January 09, 2023 in Geneva will generate meaningful funds for post-flood reconstruction.

Pakistan urgently needs the promised US$3 billion from Saudi Arabia, together with the continuation of the IMF program.

The situation has already become unsustainable and analysts expect the PKR to slip further down.

They also expect the policy rate to rise by another 100bps to 17% in the next Monetary Policy Committee meeting scheduled for January 23, 2023.     

Prime Minister Shehbaz Sharif has indicated there is no option but to comply with IMF conditions (market-based exchange rate, energy reforms, higher revenue generation), but the government needs to take immediate action.