Barely a few days after the announcement of the new deal with the International Monetary Fund, credit rating agencies Fitch and Moody’s are already warning that the deal will not be enough to get Pakistan out of its economic quagmire and that several billion more need to be coupled with even more painful economic reforms before a meaningful recovery can begin.
While Pakistan did get pledges worth over $9 billion at a moot in January, countries are usually under no real obligation to follow through on such pledges. And even if everyone came through on their pledges, the government still has to pay back about $25 billion in the ongoing fiscal year. True, Pakistani investors were extremely bullish on news of the new deal — best symbolised by Monday’s record gains at the Pakistan Stock Exchange, where trading had to be halted for an hour early in the day due to the sharp spike in the index. However, within this bullishness was a partial explanation for the rating agencies’ concern — among the stocks that gained the most were automakers, which have seen prolonged closures due to import restrictions imposed to help the country conserve dollars. The new IMF deal did away with these restrictions, which is a boon to industries dependent on imported raw materials, but will also send us back to the same unsustainable trade deficits that ate through our forex reserves the last time. It should also be noted that the government and local industry are in no position to address the trade deficit organically, as there are no local substitutes for most imported raw materials or other industrial components, and investing in industries that would make such substitutes available, while necessary, is not a viable short-term option.
Meanwhile, high interest rates will keep investment and consumption low, limiting any real GDP growth. Experts also warn that the future will remain opaque till elections are held and a new government exercises its mandate to set an economic direction. But even with a strong mandate, the slightest hiccup — such as delays in receiving secondary financing — could steer the economy off a cliff.
Published in The Express Tribune, July 5th, 2023.