Pakistan’s external finance needs are expected to remain high as long as there are considerable pressures on exchange rates and international reserves, according to projections from the International Monetary Fund (IMF).
The lender stated that reserve coverage is expected to remain fragile in numerous countries, with an average of almost 70% of short-term foreign debt in Egypt, Pakistan, and Tunisia. foreign funding needs are expected to remain significant, according to the institution’s Middle East and Central Asia Economic Outlook.
The IMF also predicted that Pakistan’s public sector gross financing requirements would rise, reaching 21% of GDP (more than Rs. 22 trillion) by 2024.
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The tight measures implemented in many nations to restore macroeconomic stability, the oil production limitations imposed by OPEC+, and the aftermath of the recent worsening in financial circumstances are all predicted to contribute to the soft patch that the MENA economies and Pakistan are expected to experience this year.
This year, inflation in Pakistan is expected to more than double to almost 27%, a reflection of growing pricing pressures. Most countries expect low inflation to continue being oil exporting nations.
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According to the lender, in the context of IMF-supported programs for some countries (such as Egypt and Pakistan) or announced programs (such as Tunisia), MENA EM&MIs and Pakistan are expected to undertake meaningful fiscal consolidation, including subsidy reforms (Egypt, Morocco, Pakistan, and Tunisia). Primary fiscal deficits are projected to decline by roughly 3 percentage points of GDP on average between 2022 and 2025.
According to the IMF, this fiscal effort would be partially offset by tighter financial conditions, with interest expenses for EM&MIs expected to rise by an average of 1% of GDP over the same period. In general, most EM&MIs should see a drop in public debt-to-GDP ratios over the medium term, which would further represent the degradation of public debt’s real value due to growth and ongoing inflation (such as in Egypt, Pakistan, and Tunisia).
However, the lender cautioned that given banks’ extremely high exposure to sovereign debt in some MENA EM&MIs and Pakistan (more than 50% of bank assets at the end of 2022), continuing to rely only on domestic financing runs the danger of worsening the relationship between sovereigns and banks.
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