The United Arab Emirates (UAE) disbursed a fresh loan of $1 billion to Pakistan on Wednesday, as the International Monetary Fund (IMF) projects a significant increase in Pakistan’s external debt to $136.5 billion by the end of the fiscal year. The loan marks an important milestone after the reopening of blocked financing pipelines.
Finance Minister Ishaq Dar announced that the UAE has deposited $1 billion with the State Bank of Pakistan (SBP), bringing the UAE’s total exposure to $3 billion. This amount places it third in terms of cash deposits, following Saudi Arabia’s $5 billion and China’s $4 billion with the central bank.
“We received confirmation today that our brother country, our friend, the UAE, has deposited $1 billion with the State of Pakistan. The Federal Reserve Bank has confirmed that this amount has been credited to the SBP’s account,” said Dar.
Just a day earlier, Saudi Arabia also deposited $2 billion with the central bank as part of a deal with the IMF. Both Saudi Arabia and the UAE had withheld bailout funds until Pakistan returned to the IMF. Following the recent staff-level agreement between Pakistan and the IMF, disbursements from both countries have resumed.
Meanwhile, the IMF has finalised its projections for Pakistan’s balance of payments in the medium term. According to officials from the finance ministry, the IMF expects Pakistan’s external debt stock to increase from an estimated $123.6 billion at the end of the last fiscal year to $136.5 billion by June 2024.
This $13 billion increase in debt stock is primarily attributed to the country’s high external debt repayment needs, financing of the current account deficit, and the requirement to increase foreign exchange reserves equivalent to 1.4 months of imports of goods and services. The IMF projects a slower pace of debt growth over the next four years, gradually reaching $153 billion by June 2028.
These projections will be included in the Memorandum for Economic and Financial Policies document after the IMF approves the Stand-By Arrangement.
The IMF has also projected a current account deficit of $6.4 billion for this fiscal year, equivalent to 1.8% of the Gross Domestic Product (GDP). Additionally, Pakistan is scheduled to make $25 billion in debt repayments, and the government hopes to secure $15 billion in debt rollovers.
The annual gross financing requirements for the next fiscal year are estimated at $28.4 billion, covering the servicing of the current account deficit and debt repayments.
Foreign exchange reserves, which stood at $4.5 billion at the end of the last fiscal year, are projected to increase to $9 billion in the next fiscal year. With the recent loans from Saudi Arabia and the UAE, the reserves have risen to $7.5 billion, and an additional boost of $1.2 billion is expected next week.
Dar claimed on Wednesday that the reserves will soon reach $14 to $15 billion, which is the level when the coalition government came into power. However, it should be noted that Dar is including private reserves, which consist of depositors’ funds.
design: Ibrahim Yahya
Sustainable foreign exchange reserves can only be achieved if receipts from exports, foreign direct investment, and remittances significantly exceed import requirements. However, for this fiscal year, the IMF projects a net foreign direct investment of around half a billion dollars.
The IMF has also shown the external public debt, which is the responsibility of the federal government, at $107.7 billion by the end of this fiscal year, an increase of nearly $11 billion within a year.
Pakistan’s financing pipelines had dried up due to strained relations with the IMF. The new IMF programme is expected to increase disbursements of foreign loans from multilateral and bilateral creditors.
In terms of trade, the IMF does not anticipate a significant increase in exports for this fiscal year. While exports are projected to rise by 10% to $30.8 billion in 2023-24, the planning minister has claimed an increase to $35 billion for this fiscal year. Imports are projected to reach $64 billion, representing a 20% increase. However, there is a projected $1 billion reduction in oil imports, bringing the total to $15.4 billion for this fiscal year. The trade deficit is expected to be nearly $34 billion, up by approximately $10 billion.
Import growth is projected to slow down after this fiscal year, largely due to limited capacity to finance imports given the thin foreign exchange reserves cover. The IMF projects workers’ remittances to reach $33 billion, a 22% increase compared to the last fiscal year.
Published in The Express Tribune, July 13th, 2023.
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