Zafar Iqbal

The stock market has experienced a significant boost since Pakistan reached a staff-level agreement with the International Monetary Fund (IMF) on June 29, 2023. The benchmark index has climbed over 54.5%, indicating renewed investor confidence. This agreement played a crucial role in removing the imminent threat of a sovereign debt default.

However, despite receiving Board approval on July 12, 2023, the lack of an upgrade from international rating agencies continues to hinder Pakistan’s ability to raise funds through commercial borrowing or issuing sukuk/Eurobonds. The government had budgeted for 4.59 billion dollars and 435 billion rupees respectively, but the high market interest rates make these options currently untenable.

The Caretaker Finance Minister has acknowledged this challenge and emphasized the need to convince rating agencies that Pakistan is committed to structural reforms. These reforms could lead to an eventual upgrade and improve the country’s borrowing capacity.

As of today, the perception exists that Pakistan will require another program loan by April 2024, following the conclusion of the current Stand-By Arrangement with the IMF. Yet, there is hope that successful conversion of non-binding Memoranda of Understanding with Gulf Cooperation Countries into binding contracts by the Special Investment Facilitation Council could positively impact Pakistan’s rating.

The Pakistani rupee experienced a period of depreciation prior to the IMF’s first review of the Stand-By Arrangement, which began on November 2nd, 2023. An agreement was reached on November 14th, but unlike previous delays in reaching such agreements, this process was smooth and swift. Notably, the rupee had strengthened earlier in the year, reaching a peak of 274 rupees to the dollar on October 17th. This was attributed to a crackdown on foreign exchange players, a measure that was widely supported. Although the rupee has since stabilized around 284 rupees to the dollar, it’s important to note that the initial exchange rate projection in the SBA documents was 286.7091 rupees.

The press release issued after the first review highlighted the government’s commitment to a market-determined exchange rate. This includes plans to enhance transparency and efficiency in the foreign exchange market and avoid administrative interventions.

The government has also launched successful crackdowns on electricity theft and commodities markets, particularly wheat and sugar. While these are positive steps, they are not sufficient on their own. Only through implementing structural reforms, clearly outlined in the SBA, can Pakistan truly overcome its economic challenges.

Furthermore, the Pakistani stock market has been on a remarkable rise since June 2023, when the country reached a staff-level agreement with the International Monetary Fund (IMF) on a Stand-By Arrangement (SBA). This agreement was crucial in preventing a looming default, and the stock market has gained over 50% since then.

However, despite the IMF’s approval of the loan program, international rating agencies have not yet upgraded Pakistan’s credit rating. This lack of an upgrade makes it difficult for the government to borrow commercially from abroad or issue sukuk/Eurobonds, as the required rates of return are simply too high.

This issue was recently acknowledged by the Caretaker Finance Minister, who emphasized the need to convince rating agencies that the country is committed to structural reforms. Such reforms could potentially lead to an upgrade, which would significantly improve the government’s ability to manage its finances.

As things stand, it is widely believed that Pakistan will require another IMF program loan by mid-April 2024, when the current SBA is scheduled to conclude. However, there is hope that the Special Investment Facilitation Council (SIFC) can improve Pakistan’s rating by converting non-binding Memoranda of Understanding with Gulf Cooperation Countries into binding contracts.

The Pakistani rupee began weakening against the dollar just before the first review of the SBA on November 2nd, 2023. While a staff-level agreement was reached without any major issues on November 14th, the rupee has continued to hover around 284 rupees to the dollar.

It is important to note that the SBA documents project an exchange rate of 286.7091 rupees. While this may change, it remains the official projection until the first SBA review documents are uploaded to the IMF website.

The IMF press release regarding the SLA highlights the importance of a market-determined exchange rate. The government is working to strengthen the transparency and efficiency of the foreign exchange market and avoid administrative actions that could influence the rupee’s value.

In addition to the IMF program, the government has also launched crackdowns on electricity theft and commodities markets. These measures are commendable, but they will not be enough to solve Pakistan’s economic problems without accompanying structural reforms.

While the ongoing crackdowns are necessary, it is equally important for the Caretaker government to implement politically challenging reforms that previous governments have been unwilling to address. Only then can Pakistan break free from its current economic impasse and achieve sustainable growth.

Apart from a few indicators, Pakistan must develop its economy on a structural foundation. Pakistan is a developing country with a population of over 200 million people and a GDP of about $340 billion. The country faces many challenges such as poverty, corruption, energy shortages, security issues, and low human development. To overcome these challenges and achieve higher economic growth, Pakistan needs to implement a comprehensive and coherent strategy that addresses both the short-term and long-term issues. Some of the key elements of such a strategy are:

• Improving macroeconomic stability and fiscal discipline by reducing the budget deficit, controlling inflation, increasing tax revenues, and managing the external debt.
• Enhancing the business environment and competitiveness by reducing regulatory barriers, improving infrastructure, promoting innovation, and diversifying exports.
• Investing in human capital and social protection by expanding access to quality education, health, and social services, especially for the poor and vulnerable groups.
• Promoting regional integration and cooperation by strengthening trade and investment ties with neighboring countries, especially China, India, and Afghanistan, and participating in regional initiatives such as the China-Pakistan Economic Corridor (CPEC) and the South Asian Association for Regional Cooperation (SAARC).
• Protecting the environment and addressing climate change by adopting green and resilient policies and practices, such as increasing the share of renewable energy, improving water management, and reducing carbon emissions.

By pursuing these policies, Pakistan can improve its economic prospects and become a regional economic hub. This would benefit not only the people of Pakistan, but also the region and the world.

Finally, while the current economic situation shows signs of improvement, sustained growth and stability hinge on the government’s unwavering commitment to structural reforms. The Caretaker government has a unique opportunity to implement these reforms, free from the political pressures that have hindered previous administrations. By taking bold steps and demonstrating a genuine commitment to economic reform, Pakistan can pave the way for a brighter future.

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