Pakistan’s stronger reserves still need a test against payments coming due

Pakistan’s December IMF reviews have reduced immediate financing pressure. The next test is whether the country can keep reserves growing when external payments are due and temporary support has to be renewed. The IMF Board completed reviews under the Extended Fund Facility and the Resilience and Sustainability Facility on 8 December, allowing access to around $1 billion and $200 million respectively. These funds can buy time for adjustment. The improvement will be more durable if recurring export and transfer receipts can cover a larger share of external payments, and if less of the remaining gap depends on short-term borrowing. IMF Board decision and indicators for Pakistan · IMF December staff report on Pakistan

The stock of reserves improved from a low base

The IMF’s December figures put gross reserves at $14.5 billion at the end of FY2025, up from $9.4 billion the previous year. That is an increase of about $5.1 billion, or 54 per cent on the rounded numbers. The same table puts the current account at a surplus of 0.5 per cent of GDP in FY2025 after a deficit of 0.6 per cent in FY2024. Those improvements predate the December release of funds. They help explain why near-term pressure has eased, while neither statistic establishes that all dollars in the reserve stock are freely available to cover an unexpected outflow. IMF Board decision and indicators for Pakistan

A reserve stock can rise for several reasons. Export and remittance receipts can exceed the amounts the private economy needs. A sovereign can borrow abroad and add the proceeds to reserves. A creditor can extend a deposit that might otherwise have to be repaid. Each can improve the near-term position. The debt created, the rights associated with particular assets and the timing of payments determine how much insurance the increase provides. To assess that insurance, look at usable assets and scheduled gross financing needs, alongside the headline stock and the maturity structure of financing. IMF December staff report on Pakistan

Suppose a country reports $15 billion in gross reserves and expects $6 billion of payments to fall due within a year. If $4 billion is credibly refinanced, the net amount it must find for those maturities is $2 billion. If only $1 billion is renewed, the amount is $5 billion. This stylised example excludes new current-account flows, other payments and valuation effects. The gross reserve number is identical in both cases. The change in rollover conditions alters the buffer that can be used for imports, intervention or other commitments. A reserve target without a refinancing calendar leaves that exposure invisible.

A current-account improvement can arise from different adjustments

A current-account surplus supported by stronger export volumes and resilient remittances gives a different outlook from a surplus driven by suppressed imports. In the second case, demand for intermediate goods and equipment may return when activity recovers, increasing the need for dollars. The IMF reports a primary fiscal surplus of 1.3 per cent of GDP in FY2025 and expects growth to increase from an estimated 3.0 per cent to a projected 3.2 per cent in FY2026. A stronger recovery would be welcome. Assessing its financing requires looking at what that growth imports and whether domestic producers can earn additional foreign exchange. IMF Board decision and indicators for Pakistan · IMF December staff report on Pakistan

The distribution of the adjustment matters. When access to foreign exchange is uncertain, small importers can struggle to finance inputs even where large firms find alternatives. Workers can bear the cost through fewer hours or delayed investment. Depreciation can improve exporters’ competitiveness while raising prices for food, fuel and inputs with little immediate domestic substitute. An external strategy that leans heavily on import compression can stabilise the aggregate in the short run at a cost to the capacity that would help earn dollars later. Sector-level import volumes and export performance are better tests of that trade-off than the headline balance alone.

Why bridge financing can be worth taking

The strongest case for official financing is that a country facing a tight maturity schedule may need time to avoid disorderly cuts and make fiscal and structural adjustments. Paying a maturing creditor on time can protect market access and reduce disruption to ordinary trade. An improvement in the quality of the adjustment is a legitimate return on that time. The risk is that each new disbursement mainly finances earlier obligations while the underlying constraints stay in place. A durable strategy should gradually reduce reliance on repeated temporary sources, even if a period of official funding is necessary to reach it. IMF Board decision and indicators for Pakistan · IMF December staff report on Pakistan

The flood-related food-price pressure identified by the IMF also complicates the immediate policy choice. A rise concentrated in affected crops calls for a different response from a broad deterioration in inflation expectations. Tight demand management can preserve confidence in the currency but may add costs for borrowers facing a real supply loss. The choice should be assessed alongside the response of imports, reserves and domestic credit. That is another reason to follow quantities and payment schedules, rather than reading every change in a reserve stock as a change in underlying capacity. IMF Board decision and indicators for Pakistan

The distinction also matters for evaluating partners. A multilateral loan, a commercial bond and a short bilateral deposit can each support the same gross reserve number. Their costs, conditions and maturity dates can differ materially. Publishing the composition of new liabilities, along with a conservative assessment of which rollovers are already agreed, would help distinguish a broadening source of finance from a concentrated dependency. IMF December staff report on Pakistan

What would make the reserve improvement durable

Track the next twelve months of maturities, actual rollovers, the sources of changes in reserves, export volumes and the cost of access to external funding. Compare import changes across fuel, consumer goods and productive inputs. Stronger exports and continued access to funding at longer maturities would improve the judgement. Repeatedly extending short-term obligations while domestic firms struggle to finance essential inputs would make it less favourable. December’s financing matters because it gives Pakistan room to demonstrate which path it is taking. IMF December staff report on Pakistan