Analysis: Deepening Pakistan political crisis dampens IMF relief hopes

LONDON/KARACHI, May 10 (Reuters) – The political crisis gripping Pakistan is eroding hopes that the South Asian country can soon get its much-needed program with the International Monetary Fund back on track and escape a debt crisis. fully fledged, analysts said.

Deadly clashes between fans of Imran Khan and police spread across the country after Pakistan’s anti-corruption agency former prime minister arrested on Tuesday.

The break in Pakistan’s feverish politics comes as the nation of 230 million prepares to hold close elections in the fall while facing its worst economic crisis in decades, with dwindling reserves and a stalled $6.5 IMF program. billion that expires in June and few other sources of financing in sight.

“With protesters in the streets, the IMF will be even more cautious about restarting the loan deal,” said Gareth Leather, senior economist for Emerging Asia at Capital Economics.

The turmoil since Khan was ousted just over a year ago has scarred the country’s economy and markets.

Pakistan’s rupee has lost almost 50% in the last 12 months. The main stock index (.KSE) has suffered a double-digit decline in the same period.

On Wednesday, the rupee fell 2% to a new record low of 290 to the dollar. The country’s international bonds, already in deeply troubled territory at just 32 cents, fell more than 1 cent on the dollar on the day.

While noisy politics that breed volatility was nothing new to Pakistan and its investors, “it really complicated the discussion with the IMF,” said Cathy Hepworth, head of emerging-market debt at PGIM Fixed Income, which owns Pakistani bonds.

“It just delays and complicates decisions.”

Time flies. Nearly 100 days have passed since the last IMF staff mission to Pakistan and the two sides have yet to reach a preliminary agreement, a key step in securing the next tranche of financing. That is the longest gap since at least 2008.

Meanwhile, foreign exchange reserves of 4,457 million dollars barely cover a month of imports.

JPMorgan analyst Milo Gunasinghe said little relief was in sight as the IMF program remained bogged down.

“The latest events probably cloud any prospects of a political breakthrough on both sides,” Milo said.

The bank recently lowered its 2023 growth forecast for the country from 1.3% to 0.1% and warned of a “stagflation shock” due to delays in talks with the IMF, while the central bank raised its key interest rate to a record 21% to fight double. digit inflation

At a local government bond auction on Wednesday, Pakistan was able to raise just Rs 63 billion ($222 million) against a target of Rs 100 billion with a cap yield rising to almost 20% for three-year maturities. .

The nuclear-armed nation faces the risk of default unless it receives massive support. The gross public debt/GDP ratio stands at 73.5%, according to government data as of December.

“The IMF has the ability and flexibility to help member countries in a variety of political circumstances,” said Reza Baqir, former governor of Pakistan’s central bank and global head of sovereign advisory services at Alvarez and Marsal.

“Usually, it is up to the country to come up with a credible policy and financing plan that, in the face of political uncertainty, credibly addresses members’ balance of payments problems.”

The armed forces remain Pakistan’s most powerful institution, having ruled directly for nearly half of the country’s 75-year history through three coups. Government called up in the army on Wednesday to help end deadly riots.

Hasnain Malik, London-based head of equity research at Tellimer, added that unless martial law was imposed, there was no reason for the IMF to suspend discussions.

“However, instances of violence are likely to justify a postponement of the election and make credible commitment to painful tax cuts even more difficult,” he said.

Reporting by Karin Strohecker and Jorgelina do Rosario in London, and Ariba Shahid in Karachi, editing by Nick Macfie

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