Pakistan Struggles with IMF Terms as Trade Deficit Widens Amid War

Delays in project implementation are frequent in Pakistan, which significantly raise the total cost of the project - a rise attributable to not only sectoral inefficiencies but also due to the persisting inability of the government to effectively deal with a narrow fiscal space that, in turn, inhibits the allocation of the necessary counterpart funds, an article in the Karachi-headquartered Business Recorder said.

This has led the International Monetary Fund, in its last three loans to Pakistan (from 2019 onwards, including the ongoing programme), to insist that the government must prioritise budgeted public sector development outlay, with money to be disbursed for only those projects that are near completion, it stated.

If one also takes account of programme support loans, then it is relevant to note that Pakistan's trade deficit has widened due to the continued prevalence of the boom-bust cycle, which is largely the outcome of flawed monetary and fiscal policies, with July-January 2026 exports declining by 5.5 per cent while imports rose by 9.8 per cent against the comparable period the year before. And, in spite of a significant rise in remittances during the period under review, the current account deficit swelled to negative $1,074 million as opposed to positive $564 million in the comparable period the year before, the article noted.

Given that petroleum and products constitute the bulk of Pakistan's imports, the country's trade deficit is expected to further widen if the war in the Middle East continues, in view of the fact that after only two days of hostilities, international oil prices have spiked by 10 per cent. What is even more disturbing for Pakistan is that senior traders have halted oil shipments through the Strait of Hormuz, which, subsequent to radio hailing by the Islamic Revolutionary Guard Corps (IRGC) declaring the Strait closed, have halted shipments, though some traffic is still flowing, it observed.

Notwithstanding any adverse impact on Pakistan's economy of any volatility in international oil prices, there is little likelihood of reducing reliance on foreign loans, given that the current year's budget has earmarked nearly $20 billion for external financing, while foreign exchange reserves remain largely debt-based, including $12 billion annual rollovers by the three friendly countries, the article pointed out.

The Economic Affairs Division's website notes that it is responsible for "assessment of requirements, programming and negotiations of external economic assistance related to the Government of Pakistan and its constituent units from foreign governments and multilateral agencies". The Division comes under the administrative control of the Ministry of Finance, which takes the final informed decision on how much external loans to procure, premised on the projected budget deficit, capacity to pay back the interest and principal on loans as and when due and the foreign exchange reserve situation. One would hope that the Ministry takes the Cabinet on board in its drive to reduce dependence on foreign loans, which would almost certainly require belt-tightening, specifically, with reference to curtailing current expenditure, the article added.

- IANS