Business Recorder
EDITORIAL: Finance Minister Muhammad Aurangzeb while attending the International Monetary Fund/World Bank spring meetings in Washington DC spelled out the country’s economic strategy in his interactions with several foreign agencies and television channels on the sidelines with a focus on restoring the foreign exchange reserves withdrawn as a consequence of the United Arab Emirates (UAE) loan recall of 3.45 billion dollars by the end of this month. The focus is critical for two reasons. First, because unlike in previous IMF programme loans when loan approval triggered support from other development (bilateral and multilateral) partners the staff-level agreement reached on 13 July 2024 for the ongoing 7 billion-dollar thirty-six month long Extended Fund Facility programme stipulated “continued strong financial support from Pakistan’s development and bilateral partners” as being “crucial for the programme to achieve its objectives.” Thus the withdrawal of the UAE package, which together with the Saudi Arabia and Chinese packages had been rolled over each year since 2019, would have generated IMF concerns that a key condition was no longer being met. Second, the Finance Minister referred to the issuance of Panda bonds (and perhaps Eurobonds) as a means to partly (or wholly) meet the withdrawal of 3.45 billion dollars by the UAE. Unlike loans from multilaterals or from friendly countries, that could be concessional, the interest payable on securing commercial debt equity is premised on not only the country’s ratings by the three international rating agencies, but also the state of the economy. Usually, if the country is on an IMF programme its default risk is lower than would otherwise have been the case. Fitch reaffirmed Pakistan’s rating at –B this week, which is defined as the presence of material default risk with a limited safety margin based on financial commitments being met with capacity for future payment vulnerable to deterioration in the business and economic environment. Pakistan’s foreign exchange reserves are mainly debt based as the trade balance is in the negative category with the expectation of it worsening due to the ongoing US/Israel and Iran conflict with remittance inflows, another form of desired foreign exchange earnings, also likely to be negatively impacted due to the conflict. In addition, the IMF’s recent report downgrades the growth momentum to 3.5 percent, a projection that pre-dates the start of the conflict, while inflation is projected to increase to 8.4 percent. The rise in inflation is likely to raise IMF concerns that the 10.5 percent policy rate needs an upward revision. It is anticipated that the State Bank of Pakistan (SBP) may argue against raising the rate as a tightening of monetary policy is, from an economic perspective, an anti-growth measure, a view that would no doubt be supported by the Ministry of Finance, yet the Fund’s 27 March 2026 press release announcing reaching the staff-level agreement on the third review notes the criticality of “maintaining an appropriately tight and data-dependent monetary policy (and that) the State Bank of Pakistan remains committed to keeping inflation within its target range and stands ready to raise interest rates should price pressures intensify or inflation expectations rise, including from pass through of recent volatility ion global food and fuel prices.” The risk of other bilaterals and multilaterals withdrawing their support in the event that the SBP does not follow the Fund prescription is too high. To conclude, issuance of bonds against the loan recall by the UAE, unless in the unlikely event that it is at a lower rate than that being charged by the UAE, would increase the budgeted debt servicing charge which, in turn, would raise current expenditure putting pressure on the government to further slash Public Sector Development Programme and/or raise domestic borrowing – elements that would reduce the growth rate and increase the country’s indebtedness. Copyright Business Recorder, 2026
Go to News Site