RISK OF DEFAULT & CRISIS IN PAKISTAN 2023

Pakistan's economic status has drastically declined during the last 12 months. The currency value is decreasing. Inflation is on its peak. A severe energy deficit and a political crisis occur continuously. Restriction on imports, the sudden increase in policy rates, the fall in the value of the rupee and the drastic reduction in budget spending have all severely restricted economic growth and raised the risk of inflation. Since February 2023 a very minor improvement has occurred. It remains unstable and the chance of default is still very high.

Over the past 18 months Pakistan external accounts which are already very weak structurally have become much worse and putting the nation in danger of experiencing a balance-of-payments crisis. Although the country's external finances had recovered by late March 2023 the refinancing risks remained quite significant.

The nation's foreign accounts started decreasing in the mid of 2021 as a result of:

The sharp spike in imports brought on by the revival of the economy, particularly the rise in demand for capital goods The country's rising oil costs (both prices and quantities have gone up).

All commodity prices increasing because of the situation in Ukraine caused the balance of payments to worsen. The current account deficit increased by 3.8 percentage points to 4.6% of GDP in the fiscal year (FY) 2021–2022 which ended in late June 2022. Reserves of foreign currency decreased by 45%.

Since the summer of 2022 the current account deficit has significantly decreased in huge part. Between Q2 and Q4 2022 imports decreased by 29.7%. As a result of restrictions on imports (between May and July 2022 only so called essential goods could be imported) and a ban on banks opening letters of credit to businesses in all sectors that were deemed non-strategic (i.e., all sectors, with the exception of energy and food).

Despite this decrease in exports (caused by limitations on industrial production and the decline in wheat and cotton sales as a result of the floods in October 2022). The current account deficit was only 1.1 billion USD in Q4 2022 as opposed to 4.3 billion USD in Q2 2022.

Even though all import restrictions were formally ended in January 2023, but in reality company imports remained restricted due to limited foreign exchange reserves.

Due to the government's noncompliance with the fund's budgetary consolidation conditions. The Extended Fund Facility with the IMF which has been ceased since November 2022.

The risk of default has marginally decreased (at least temporarily). there is still a high probability of default occurring. According to rating agencies and the IMF Pakistan needs for external funding will be in the range of USD 30 billion annually. However in the end of June its foreign exchange reserves might only total 12 billion USD.

The government is being forced by the economy to relax its tight fiscal policy.  With the announcement of a petrol subsidy for the most economically disadvantaged households in mid-March. The IMF's distribution of the cash might be delayed once more if this policy is confirmed. There is no assurance this will retain the current government in power after the general election set for October 2023.

Pakistan is in a dreadful situation. It seriously needs support from abroad. Pakistan can only afford imports for a few weeks because of its dangerously low foreign exchange reserves. The central bank increased interest rates significantly in response to a declining currency. Rising food and petrol prices having a negative impact on common people lives. Recent damage from the floods made the economy worse.