In a recent report, the International Monetary Fund (IMF) expressed criticism of Pakistan’s latest budget, increasing the likelihood that the lender may withhold the much-needed aid before the bailout programme concludes at the end of June.

According to Bloomberg, this development could lead to a severe dollar shortage in the first half of the upcoming fiscal year, potentially resulting in a higher chance of default, lower growth, and increased inflation and interest rates.

The IMF’s critique of the budget stems from its belief that it does not adequately address the need to broaden the tax base and includes a tax amnesty. The current foreign currency reserves of Pakistan stand at $4 billion. However, with approximately $900 million in debt repayment due this month, the reserves will deplete by the end of June unless the expected IMF aid materialises.

The country faces the challenge of repaying an additional $4 billion between July and December, which cannot be rolled over. Given the projected reserves falling below $4 billion at the start of fiscal year 2024, default seems highly probable, according to the report titled “Pakistan Insight.”

The absence of an IMF programme would significantly limit the options for obtaining fresh external funding. The report suggests that negotiations for a new bailout agreement with the IMF are unlikely to commence until after the elections in October. Furthermore, even if an agreement is reached, actual aid disbursement under a new programme would not occur until December.

In the meantime, Pakistan must focus on conserving dollars by restricting import purchases and maintaining a surplus in its current account balance to fulfill its obligations. To avert default in the first half of fiscal year 2024, the country will also need to seek assistance from friendly nations.

The report warns of severe consequences for Pakistan’s economy if the anticipated IMF aid is not received by the end of June. Import restrictions will need to remain in place, and the State Bank of Pakistan is expected to raise interest rates above the current level of 21 per cent to further reduce demand for imports and preserve foreign exchange reserves.

The report’s base case assumes that the State Bank of Pakistan will maintain its current policy stance until December, but that prediction relies on the assumption of IMF aid arriving by the end of June.

Continued import restrictions and a weaker Pakistani rupee are likely to contribute to higher inflation in fiscal year 2024 compared to current forecasts. It is projected that inflation will average around 22 per cent, while increased borrowing costs and limitations on importing raw materials will further hamper production and dampen consumption.

In addition, if the expected IMF aid does not materialise this month, the report predicts that Pakistan’s growth in fiscal year 2024 will be much weaker than the current forecast of 2.5 per cent.

Furthermore, the higher interest rates resulting from the aid shortfall will lead to increased debt servicing costs for the government. The report reveals that approximately half of the fiscal year 2024 budget is allocated to debt servicing, exacerbating the country’s fiscal challenges.

With the IMF aid hanging in the balance, Pakistan faces a critical period in its economic trajectory, where strategic financial decisions, reliance on friendly nations, and stringent economic measures will be essential to avoid further complications and ensure stability in the future.