Analysts said the political crisis gripping Pakistan is undermining hopes that the South Asian country can soon get its much-needed program with the International Monetary Fund back on track and ride out a full-fledged debt crisis.
Violent clashes erupted between Imran Khan’s supporters and police across the country after Pakistan’s anti-corruption agency arrested the former prime minister on Tuesday.
The latest collapse in Pakistan’s feverish politics comes as the country of 230 million prepares for a deeply contested election in the fall while grappling with its worst economic crisis in decades, with dwindling reserves and a stalled $6.5 billion International Monetary Fund program that expires in June and scarce other financing sources on the horizon.
“With protesters taking to the streets, the IMF will be more cautious about resuming the loan deal,” said Gareth Leather, chief economist for Emerging Asia at Capital Economics.
The unrest since Khan’s ouster just over a year ago has taken a toll on the country’s economy and markets.
The Pakistani Rupee has lost nearly 50% in the past 12 months. The main stock index suffered a double-digit decline over the same period.
On Wednesday, the rupee plunged to a new record low of 289.5 per dollar. The country’s international bonds, which are already in deep crisis territory at 32 cents, fell more than 1 cent in the dollar on the day.
JPMorgan analyst Milo Jonasinge said little relief from political uncertainty was on the horizon while the International Monetary Fund program remained idle.
“The latest developments are likely to weaken any possibility of a political breakthrough between the two sides,” Melo said.
The bank recently cut its 2023 growth forecast for the country from 1.3% to 0.1% and warned of a “stagflation shock” due to delays in IMF talks, while the central bank raised its key interest rate to 21% to combat weak-inflation figures.
The nuclear-armed country risks default unless it receives massive support. The ratio of total public debt to GDP is 73.5%, according to government data as of December. The foreign exchange reserves of $4.457 billion barely cover one month’s imports.
“The IMF has the capacity and flexibility to assist member countries in a variety of political circumstances,” said Reza Bagher, former governor of the Central Bank of Pakistan and global head of sovereign advisory services at Alvarez and Marsal.
“It is usually up to the state to present a credible plan of policies and financing which, in the face of political uncertainty, will reliably address the members’ balance-of-payments problems.”
The armed forces remain Pakistan’s most powerful institution, having ruled outright for nearly half of the country’s 75-year history through three coups.
Hasnain Malik, head of equity research at London-based Tellimer, added that unless martial law is imposed, there is no reason for the IMF to suspend discussions.
“However, instances of violence are likely to justify the postponement of elections and make it more difficult to credibly adhere to painful fiscal cuts,” he said.


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