How Pakistan's worsening political situation dampens hopes for aid from the IMF

The political crisis engulfing Pakistan is eroding hopes that the South Asian country can get its much-needed programme with the International Monetary Fund back on track soon and escape a full-blown debt crunch, analysts said. Deadly clashes between supporters of Imran Khan and police spread across the country after Pakistan’s anti-corruption agency arrested the former prime minister on Tuesday. **Also Read: The 121 cases against Pakistan’s Imran Khan** The rupture in Pakistan’s febrile politics comes as the 230-million-population nation prepares to hold tightly fought elections in the autumn while facing its worst economic crisis in decades, with dwindling reserves and a stalled $6.5 billion (Rs 53,242,800 crore) IMF programme that is expiring in June and scarce other financing sources in sight. “With protesters on the streets, the IMF will be even more wary about restarting the loan deal,” said Gareth Leather, senior economist for Emerging Asia at Capital Economics. The turmoil since Khan was ousted just over a year ago has scarred the country’s economy and markets.

Pakistan’s rupee has lost nearly 50 per cent over the past 12 months. The main stock index has suffered a double-digit decline over the same period. On Wednesday, the rupee tumbled some two per cent to a fresh record low of 290 to the dollar. The country’s international bonds, already in deeply distressed territory of as little as 32 cents, dropped more than one cent in the dollar on the day. **Also Read: What is the Al-Qadir Trust case that led to Imran Khan's arrest?** While noisy politics generating volatility was nothing new for Pakistan and its investors, they “really complicated the discussion with the IMF”, said Cathy Hepworth, head of emerging market debt at PGIM Fixed Income, which holds Pakistan bonds. “It just delays and complicates decisions.” Time is ticking down. Nearly 100 days have passed since the last IMF staff level mission to Pakistan and the two sides have yet to strike a preliminary deal — a key step to secure the next funding tranche. That is the longest such gap since at least 2008. Meanwhile foreign exchange reserves at $4.457 billion (Rs 36,508,178 crore) cover barely a month’s worth of imports. JPMorgan analyst Milo Gunasinghe said little relief was in sight while the IMF programme remained stalled. “The latest developments likely dampen any prospect of a political breakthrough across both sides,” Milo said. [caption id=“attachment_12577922” align=“alignnone” width=“640”] Deadly clashes between supporters of Imran Khan and police spread across the country after Pakistan’s anti-corruption agency arrested the former prime minister on Tuesday. Reuters[/caption] The bank recently lowered its 2023 growth forecast for the country from 1.3 per cent to 0.1 per cent and warned of “stagflation shock” due to delays in the IMF talks, while the central bank hiked its key interest rate to a record 21 per cent to fight double-digit inflation. At a local government bond auction on Wednesday, Pakistan was able to raise only 63 billion Pakistani rupees ($222 million or Rs 1,818 crore) against a target of 100 billion Pakistani rupees with the cut-off yield rising to nearly 20 per cent for three-year maturities. The nuclear-armed nation faces the risk of a default unless it receives massive support. The gross public debt-to-GDP ratio stands at 73.5 per cent, according to government data as of December. “The IMF has the capacity and the flexibility to help member counties in a variety of political circumstances,” said Reza Baqir, former central bank governor of Pakistan and global head of sovereign advisory services at Alvarez and Marsal. “It is usually up to the country to present a credible plan of policies and financing that, in the face of political uncertainty, will credibly address the members’ balance of payment problems.” [caption id=“attachment_12577942” align=“alignnone” width=“640”] Police detain a supporter of Pakistan’s former prime minister Imran Khan who with others are protesting against the arrest of their leader, in Lahore, Pakistan. AP[/caption] The armed forces remain Pakistan’s most powerful institution, having ruled directly for close to half the country’s 75-year history through three coups. The government called in the army on Wednesday to help end deadly unrest. Hasnain Malik, head of equity research at London-based Tellimer, added that unless martial law was imposed, there was no reason for the IMF to suspend discussions. “However, instances of violence likely justify a postponement in the election and make credibly committing to painful fiscal cuts even harder,” he said. Read all the Latest News, Trending News, Cricket News, Bollywood News, India News and Entertainment News here. Follow us on Facebook, Twitter and Instagram.