PAKISTAN is grappling with a multifaceted economic crisis that has drawn significant attention from global rating agencies. On one hand, the government must implement stabilization policies to manage its escalating fiscal deficit for sustainable debt management amid rising political polarization. On the other hand, it faces daunting external liquidity and funding challenges. These complexities are prominently highlighted in the comments of rating agencies on Pakistan’s budget for 2024-25.
In its latest commentary on Pakistan’s budget, Fitch Ratings underscored the critical need for a tax-heavy budget to help Islamabad secure fresh IMF funding. Such funding is pivotal for narrowing the fiscal deficit and mitigating external pressures. However, this stabilization strategy comes with a caveat: it could potentially dampen economic growth, even as some short-term economic indicators show improvement. Fitch projects a growth rate of 3% for the fiscal year 2025, which is more optimistic than the World Bank’s Global Economic Prospects report that estimates a growth rate of 2.3%.
Despite these projections, Fitch remains skeptical about the government’s ability to meet its ambitious fiscal targets. The concern is that revenue generation may fall short, while current expenditure could exceed budget expectations. This skepticism is rooted in the challenges associated with achieving substantial revenue amidst a slowing economy and increasing political turmoil.
Beyond the domestic fiscal challenges, Pakistan’s external liquidity and funding situation remain significant credit challenges. Fitch describes these as the country’s key credit risks. Pakistan’s ability to secure a new IMF deal is crucial for maintaining the stringent policy settings required to control external financing needs. However, meeting the IMF’s stringent conditions is expected to become increasingly difficult, given the projected funding needs of approximately $20 billion. This figure includes maturing bilateral debt that is likely to be rolled over.
The crux of the issue lies in Pakistan’s exposure to external funding conditions and the potential for policy missteps. Fitch’s ‘CCC’ rating for Pakistan reflects these high external funding risks amid elevated medium-term financing requirements. Similarly, Moody’s highlights that weak debt affordability exacerbates debt sustainability risks, with the government spending over half its revenues on interest payments.
Both Fitch and Moody’s emphasize that the government’s ability to sustain reform implementation is crucial for achieving budget targets and unlocking the external financing needed to alleviate liquidity risks and stimulate growth. The challenge lies in balancing the need for fiscal discipline with the socio-economic impacts of stabilization measures.
Stabilization policies often entail austerity measures that can slow down economic activity. In Pakistan’s context, this translates into a contractionary impact on growth, affecting everything from industrial output to consumer spending. While these measures are necessary for macroeconomic stability, their adverse effects on growth cannot be ignored.
The International Monetary Fund (IMF) plays a pivotal role in Pakistan’s economic strategy. Securing IMF funding requires adherence to strict conditionalities that often include reducing fiscal deficits, enhancing revenue collection and cutting down on subsidies. While these measures are intended to restore fiscal discipline, they can also lead to public discontent and political resistance.
The projected $20 billion funding requirement underscores the magnitude of the challenge. This includes the rollover of maturing bilateral debt, which, while temporarily alleviating immediate pressures, does not address the underlying structural issues. Hence, while IMF programs provide temporary relief, they are not a panacea for Pakistan’s long-term economic problems.
For Pakistan, navigating this economic crisis requires a multifaceted approach that goes beyond short-term stabilization. Structural reforms aimed at broadening the tax base, improving public sector efficiency and fostering an environment conducive to private sector investment are essential. These reforms can help enhance revenue generation and reduce dependency on external borrowings.
Additionally, measures to improve the business climate, such as streamlining regulatory frameworks, enhancing the ease of doing business and addressing corruption, can stimulate domestic and foreign investment. Such investments are critical for creating jobs, boosting productivity and ultimately achieving sustainable economic growth.
Pakistan’s ongoing economic crisis is a complex interplay of fiscal deficits, external liquidity challenges and the need for structural reforms. While stabilization measures and IMF programs provide a framework for immediate relief, the long-term solution lies in comprehensive reforms that can stimulate growth and ensure sustainable debt management. The government’s ability to implement and sustain these reforms amidst political and economic challenges will be crucial in determining Pakistan’s economic trajectory. As global rating agencies have highlighted, achieving fiscal targets and unlocking external financing are imperative for easing liquidity risks and fostering growth. However, this delicate balancing act requires careful policy calibration and strong political will to navigate the economic challenges ahead.
—The writer is contributing columnist, based in Turbat.
