Pakistan’s deepening political crisis douses hopes for IMF relief

[May 10, 2023]  By Karin Strohecker, Jorgelina do Rosario and Ariba Shahid

LONDON/KARACHI (Reuters) - The political crisis engulfing Pakistan is eroding hopes that the South Asian country can get its much needed programme with the International Monetary Fund back on track soon and escape a full-blown debt crunch, analysts said.

Violent clashes between supporters of Imran Khan and police broke out across the country after Pakistan's anti-corruption agency arrested the former prime minister on Tuesday.

The latest rupture in Pakistan's febrile politics comes as the 230-million-population nation prepares to hold tightly fought elections in the autumn while facing its worst economic crisis in decades, with dwindling reserves and a stalled $6.5 billion IMF programme that is expiring in June and scarce other financing sources in sight.

"With protesters on the streets, the IMF will be even more wary about restarting the loan deal," said Gareth Leather, senior economist for Emerging Asia at Capital Economics.

The turmoil since Khan was ousted just over a year ago has scarred the country's economy and markets.
 

Pakistan's rupee has lost nearly 50% over the past 12 months. The main stock index has suffered a double-digit decline over the same period.

On Wednesday, the rupee tumbled to a fresh record low of 289.5 to the dollar. The country's international bonds, already in deeply distressed territory of as little as 32 cents, dropped more than 1 cent in the dollar on the day.

JPMorgan analyst Milo Gunasinghe said little relief from political uncertainty was in sight while the IMF programme remained stalled.

"The latest developments likely dampen any prospect of a political breakthrough across both sides," Milo said.

The bank recently lowered its 2023 growth forecast for the country from 1.3% to 0.1% and warned of "stagflation shock" due to delays in the IMF talks, while the central bank hiked its key interest rate to a record 21% to fight double-digit inflation.

Supporters of Pakistan's former Prime Minister Imran Khan throw stones towards police during a protest against Khan's arrest, in Peshawar, Pakistan, May 10, 2023. REUTERS/Fayaz Aziz

The nuclear-armed nation faces the risk of a default unless it receives massive support. The gross public debt-to-GDP ratio stands at 73.5%, according to government data as of December. Foreign exchange reserves at $4.457 billion cover barely a month's worth of imports.

"The IMF has the capacity and the flexibility to help member counties in a variety of political circumstances," said Reza Baqir, former central bank governor of Pakistan and global head of sovereign advisory services at Alvarez and Marsal.

"It is usually up to the country to present a credible plan of policies and financing that, in the face of political uncertainty, will credibly address the members’ balance of payment problems."

The armed forces remain Pakistan's most powerful institution, having ruled directly for close to half the country's 75-year history through three coups.

Hasnain Malik, head of equity research at London-based Tellimer, added that unless martial law was imposed, there was no reason for the IMF to suspend discussions.

"However, instances of violence likely justify a postponement in the election and make credibly committing to painful fiscal cuts even harder," he said.

(Reporting by Karin Strohecker and Jorgelina do Rosario in London, and Ariba Shahid in Karachi, Editing by Nick Macfie)

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