External loan options limited: IMF
Pakistan will need over $19 billion to service its foreign debt and finance the external deficit in the next fiscal year as the country's access to foreign commercial loans and budget support will remain limited, a new International Monetary Fund (IMF) report stated on Saturday.
The IMF's staff-level report said that Pakistan's economy would be impacted by the United States' tariffs. The report has been released a week after the global lender approved the second loan tranche of $1 billion for Islamabad and cleared the new $1.3 billion climate financing package.
The report showed that for fiscal year 2025-26, starting from July, Pakistan's gross external financing need would be $19.3 billion. Out of this, nearly $17 billion is available in the shape of new loans and rollovers of the existing debt. It identified a $2.4 billion gap against which the country was securing commitments from foreign creditors.
The $19.3 billion financing includes $1.5 billion for the current account deficit and the remaining for repaying the foreign debt.
However, some of the traditional funding sources are either drying up or will not be available. Against Pakistan's desire to get an annual $1.2 billion under the Saudi oil facility, the IMF has estimated the available financing at $800 million for the next fiscal year.
Another $410 million will come under the new IMF package, called the Resilience and Sustainability Facility (RSF), according to the IMF.
But the lender has estimated the receipt of only $400 million on account of sovereign bonds — that too from China. It has shown just $85 million in new net borrowing from foreign commercial banks, indicating that the global markets are still not accessible.
"Access to external commercial financing is expected to remain limited during the programme, with a small "Panda" bond issuance anticipated in fiscal year 2025-26, ahead of a gradual return to the Eurobond market assumed in FY27," it added. The IMF said that Pakistan's public debt remained sustainable over the medium term. But it added that the continuation of fiscal consolidation and progress with lengthening maturities of domestic debt, near-term risks of sovereign stress remain high, reflecting Pakistan's very large gross financing needs and past challenges in obtaining external financing.
Another worrisome element for the government was that the IMF did not show any budget support loan from the World Bank in the next fiscal year too. The Express Tribune had reported a few months ago that the World Bank had stopped Pakistan's budget financing.
The IMF has shown only $250 million worth of budget support financing by the Asian Development Bank.
It has lowered the current account deficit projection for this fiscal year to just $229 million against its original estimate of $3.6 billion.
The IMF said that the deficit would remain low due to resilient exports and a stronger remittance outlook, as improved macro and foreign exchange stability supported a rebound in remittance inflows through formal channels.
Over the medium term, the IMF said that Pakistan's current account deficit is expected to widen modestly to around 1% of GDP as imports rebound.
Gross international reserves are expected to continue to strengthen, supported by financing committed by multilateral and bilateral creditors, as well as prospective RSF disbursements.
While commenting on the US tariff policy's impact, the IMF said that uncertainties around the impact of recent tariff announcements on Pakistan's economic and financial conditions are significant, with risks skewed to the downside.
While there is considerable uncertainty about the final impact on the economy, the tariffs and subsequent financial market reaction are expected to weigh on Pakistan's exports and GDP, with growth revised downward marginally in FY25, said the IMF.
In addition to the direct impact on Pakistan's exports to the US, Pakistan is expected to face indirect effects via the impact of tariffs on the economies of Pakistan's other trading partners, tighter global financial conditions, potentially lower remittances and increased trade policy uncertainty, according to the report.
But the net impact on balance of payments is projected to be moderated by the recent commodity price declines and the downgrade in activity, which will reduce Pakistan's import bill.
The IMF said that Pakistan's sovereign spreads have increased sharply since April 2, the day the US introduced new tariffs, but market access to external financing in the near term is already limited, vitiating any near-term impact.
The IMF said that if outflow pressures intensify, it will be critical that the exchange rate is allowed to adjust. The net impact on inflation is also projected to be modest, with some downward pressure expected from lower commodity prices and weaker growth, stated the report.
The IMF said that Pakistan's capacity to repay the fund has improved somewhat but remains subject to significant downside risks and critically dependent on policy implementation and timely external financing. The IMF's lending would peak at about $13 billion in September 2027, which will be equal to 466% of the quota and about 51% of projected gross foreign exchange reserves in 2027.
The report underlined that geopolitically driven increases in commodity prices, tightening in global financial conditions, weakening of remittances, or higher trade barriers in other trading partners could adversely affect Pakistan's external stability. The other main immediate risk relates to policy slippages given pressures to ease policies and provide tax and other concessions and subsidies to connected interests, it added. "An intensification of political or social tensions could also weigh on policy and reform implementation".