Pakistan’s foreign exchange reserves fell below $10bn, threatening to spill over into a fullblown economic crisis unless policy makers secure a loan from the International Monetary Fund.
The stockpile decreased by $366mn in the week ended May 27 to stand at $9.72bn, the central bank said in a statement on its website on Thursday. That’s roughly a 50% drop from August and enough to pay for less than two months of imports.
The shortage of dollars could worsen as the nation forecasts its trade deficit will widen to a record $45bn in the year ending June. Authorities have raised fuel and electricity prices, a key condition to unlock the remaining $3bn of an existing loan by the multilateral lender.
In addition to raising fuel prices, Pakistan will need to make further fiscal adjustments to narrow the budget deficit for fiscal year 2023 to secure the IMF loan, said Raphael Mok, head of Asia country risk at Fitch Solutions in Singapore. This will likely entail measures to boost tax collection and to reduce subsidies and capital expenditure, he said.
“The widening current-account deficit is also a source of concern for policy makers and IMF officials, for which the government has announced a ban on over 30 luxury goods including cars,” Mok said.
A $2.3bn deposit from Chinese banks is likely to shore up Pakistan’s foreign reserves, the country’s Finance Minister Miftah Ismail said in a Twitter post on Thursday, adding that the terms and conditions for the refinancing have been agreed upon.
Still, Pakistan’s use of those funds may be limited because it’s unclear what the terms and conditions are, said Mok.
The cost of insuring Pakistan’s debt against the risk of default remains elevated after jumping to the highest in over a decade last week. The nation’s currency has pared some losses after hitting a record low 202 per dollar last week, but is still down about 10% this year, according to data compiled by Bloomberg.
Pakistan’s inflation rate has accelerated to over a two year high on rising food and fuel prices, and stocks have tumbled about 5% this year.


Moody’s lowers Pakistan outlook to negative over IMF delay


Moody’s Investors Service downgraded its outlook on Pakistan to negative from stable, citing financial concerns that includes a delay in the revival of International Monetary Fund’s bailout.
The rating agency’s decision is driven by Pakistan’s heightened external vulnerability risk and uncertainty around its ability to secure additional external financing to meet its needs, Moody’s said in a statement. It left the credit assessment for the nation at B3, a junk rating.
Pakistan has seen its finances deteriorate amid heightened global uncertainty and political turmoil. It is looking to secure an agreement with the multilateral lender to access the remaining $3bn of an existing loan and unlock funds from other sources to avert a default. The country needs about $36bn in financing for the fiscal year starting July.
“Pakistan’s external vulnerability risk has been amplified by rising inflation, which puts downward pressure on the current account, the currency and – already thin – foreign exchange reserves, especially in the context of heightened political and social risk,” said the statement.
Pakistan’s headline inflation quickened to the highest level in more than two years in May, while its currency is down about 10% this year, making it the worst performing currency in Asia. Its foreign exchange reserves have dropped by more than half to about $10bn in the past year, that’s enough to pay for less than two months of imports.
Pakistan’s weak institutions and governance strength adds uncertainty around the future direction of macroeconomic policy, including whether the country will complete the current IMF program, Moody’s said.
Pakistan’s Prime Minister Shehbaz Sharif coalition government came to power in April, after ousting Imran Khan in a vote. It has, since then, been under pressure with Khan holding protests in different cities and drawing large crowds amid citizen’s anger on Asia’s second fastest inflation. The new government’s recent decision to raise fuel prices, as part of efforts to meet conditions set by the International Monetary Fund to revive a stalled aid program, could further stoke price gains.