International lenders and governments have pledged more than $9 billion to help Pakistan recover after last year’s catastrophic floods displaced tens of millions and hit the country’s already struggling economy, which is facing an energy crisis and dwindling foreign exchange reserves is.
Following a pledging conference in Geneva on Monday hosted by UN Secretary-General António Guterres and Pakistani Prime Minister Shehbaz Sharif, Islamabad said it had pledges of $4.2 billion from the Islamic Development Bank, $2 billion from the World Bank and 1 billion Saudi Arabia to help rebuild after the floods that affected more than 33 million people.
The disaster was the latest in a series of blows over the past year to hit Pakistan’s already cash-strapped economy, prompting the government to implement cost-saving measures such as energy rationing and companies cutting production.
The US, EU, UK, China and Germany also pledged aid on Monday in what Pakistani Minister of Information and Broadcasting Marriyum Aurangzeb called a “generous flood” from the international community.
But Pakistan had estimated it would need $16.3 billion in flood relief and the broader economic picture is even more desperate. The country’s foreign exchange reserves have shrunk to $5.6 billion from $10 billion in June and, according to official figures, only cover a month’s imports. In recent days, Pakistani media have widely reported, without citing sources, that the figure has dropped to $4.5 billion after a $1.2 billion repayment to UAE banks.
Analysts said that while the aid would help Pakistan recover and adapt to climate change-related disasters, the funds would do little to alleviate the immediate liquidity crisis.
“The donor promises . . . are specific and long-term, and should aim to rebuild the areas and people devastated by the summer’s floods — not to prop up foreign reserves,” said Madiha Afzal, a fellow at the Brookings Institution in Washington. “Pakistan’s reserves have been in a precarious position since before the floods, and are again teetering at about a month’s worth of imports.”
Inflationary pressures, the aftermath of the Russian war in Ukraine and the floods have combined to create “perhaps the greatest economic challenge Pakistan has ever faced,” Afzal added.
The Pakistani government has taken steps to protect limited resources and last week ordered malls and markets to close until 8.30pm to conserve energy. Millat Tractors, Pakistan’s largest agricultural machinery maker, shut down production citing “lower demand for tractors and liquidity constraints”. The State Bank of Pakistan has restricted corporate access to letters of credit to save cash.
Imran Khan, the former prime minister who was ousted by parliament in 2022, has warned of the risk of a default if Pakistan cannot secure additional financing from the IMF, which last year launched a stalled £7bn aid program.
But the lender has withheld the next $1.1 billion tranche of support as it urges Islamabad to adopt austerity measures such as spending cuts and hikes in subsidized gas and energy prices.
Ishaq Dar, Pakistan’s finance minister, has repeatedly dismissed the possibility that the country could default on its external debt. “Our foreign exchange reserves by the end of June would be much better than you think,” he told reporters last week.
Dar met IMF officials on the sidelines of the pledging conference, where they discussed “challenges for the regional economy posed by climate change” and Pakistan’s finance minister “reaffirmed the commitment to complete the fund program,” the ministry said in a statement.
Pakistan’s powerful new army chief, General Syed Asim Munir, is visiting Saudi Arabia, a historic lender to Islamabad in times of crisis. On Tuesday, Saudi state media reported that the de facto ruler, Crown Prince Mohammed bin Salman, had called to agree to increase investment in Pakistan’s economy to $10 billion.
“I think Pakistan will ultimately avoid a default for now, mostly with help from the IMF and loans from friendly countries like Saudi Arabia and China, but these will not fix the economy’s clear underlying malaise,” Afzal said.
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Since Dar took over the treasury in September, Pakistan has managed the rupee-to-dollar exchange rate, slowing the currency’s depreciation but hurting the real economy by making even more scarce the dollars companies desperately need to run their businesses.
“There is undoubtedly a risk of default, especially if the State Bank of Pakistan sticks to the unofficial currency peg,” said Javed Hassan, founding chairman of the Economic Advisory Group. “Even if that is lifted and Pakistan successfully completes its review by the IMF, the risk of default remains over the next six to 12 months.”
Pakistan is chronically spending beyond its means, analysts said, and is therefore heavily reliant on foreign credit, leading to regular crises and bailouts by the IMF and bilateral lenders led by the Gulf states and China. Total foreign debts and liabilities of Pakistan are about $100 billion.
Improving ties with the IMF would pave the way for Pakistan to secure further financing from other bilateral lenders, continue to service its debt and pay for energy this year.
However, Islamabad’s ties with the Washington-based multilateral lender were strained last month when Dar appeared to downplay their importance. “I don’t care whether they come,” said the finance minister, referring to the ninth inspection of the lender, which has not yet been completed. “I don’t have to plead before them.”
The bitterness between Sharif’s and Khan’s bitterly opposed political camps has exacerbated the economic crisis. Khan last week called for snap elections and his Pakistani party Tehreek-e-Insaf warned of the dangers to the economy.
https://www.ft.com/content/a96fbd92-2148-4520-9e89-31becab61304 Pakistan secures more than $9 billion in pledges for post-flood reconstruction