Pakistan secures over $9 billion in flood recovery pledges

International lenders and governments have pledged more than $9 billion to help Pakistan recover from catastrophic flooding last year that displaced tens of millions of people and impacted an already struggling economy The country is facing an energy crisis and its foreign exchange reserves are dwindling.

Following a donors conference in Geneva on Monday chaired by United Nations Secretary-General António Guterres and Pakistani Prime Minister Shehbaz Sharif, Islamabad said it had prepared $4.2 billion in commitments from the Bank Islamic Development Bank, $2 billion from the World Bank and $1 billion from the Islamic Development Bank. Saudi Arabia to help it rebuild from floodaffected more than 33 million people.

The disaster is the latest in a series of blows over the past year. Pakistani economyis currently short of cash, and has led the government to implement cost-saving measures such as energy distribution and companies to cut production.

The US, EU, UK, China and Germany also promised aid on Monday in what Pakistan’s Broadcasting and Information Minister Marriyum Aurangzeb called “generosity” from the international community.

But Pakistan has estimated that it will need $16.3 billion for flood relief and the broader economic picture is even more desperate. The country’s foreign exchange reserves fell to $5.6 billion, down from $10 billion in June, and covers only one month’s worth of imports, according to official data. In recent days, Pakistani media, without specifying the source, have widely reported that the figure has dropped to $4.5 billion following a refund of $1.2 billion to banks. products of the United Arab Emirates.

Analysts say that while aid will help Pakistan To recover and adapt to climate change-related disasters, the funds will do little to alleviate the immediate cash crunch.

“Sponsor commitment. . . Madiha Afzal, a fellow at the Brookings Institution in Washington, said it was specific and long-term, and aimed at rebuilding areas and lives ravaged by summer floods – not strengthening the project. foreign exchange reserves. “Pakistan’s stockpiles have been in a precarious position since before the floods and are moving back to import levels by about a month.”

Inflationary pressures, the aftermath of Russia’s war in Ukraine and flooding have combined to create “perhaps the biggest economic challenge Pakistan has ever seen,” Afzal added.

The Pakistani government has taken steps to protect limited resources, last week asking shopping malls and markets to close by 8:30 p.m. to conserve energy. Millat Tractor, Pakistan’s largest agricultural machine manufacturer, has stopped production citing “decreased demand for tractors and limited cash flow”. The State Bank of Pakistan has restricted companies’ access to letters of credit to save cash.

Imran Khan, a former prime minister ousted by parliament in 2022, has warned of the risk of default if Pakistan is unable to secure additional financing from the IMF, which last year re-authored its 7 aid program. The stalled billion dollars were initially agreed in 2019.

But the lender has hold the next $1.1 billion supportas it pushes 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 denied the country could default on foreign debt. “Our foreign exchange reserves at the end of June will be much better than you think,” he told journalists last week.

Dar met IMF officials on the sidelines of a donor conference, where they discussed “challenges to regional economies posed by climate change” and Pakistan’s finance minister “reiterates his commitment to complete the program of the Foundation,” according to a statement from the ministry.

Pakistan Powerful new army commander General Syed Asim Munir is visiting Saudi Arabia, a historic lender of Islamabad in times of crisis. On Tuesday, Saudi state media reported that Crown Prince Mohammed bin Salman, the de facto ruler, had called for consideration of increasing investment in the Pakistani economy to $10 billion and a cap on the money. sent from the Gulf kingdom to the State Bank of Pakistan to 5 billion dollars.

“I think Pakistan will eventually avoid default for the moment, largely with the help of the IMF and loans from friendly countries like Saudi Arabia and China, but those won’t. address the obvious underlying instability of the economy,” Afzal said.

Sri Lanka, a neighboring country in the region, with a total debt of up to 51 billion USD, mainly owed by private lenders, stopped repaying in May, becoming the first Asian country to default. debt for decades.

Since Dar took over the finance ministry in September, Pakistan has managed the exchange rate between the rupee and the dollar. slow down currency devaluation but did damage to the real economy by making the dollars that companies so desperately need for their operations even more scarce.

“The risk of default is certainly there, especially if the State Bank of Pakistan continues to maintain the unofficial currency peg,” said Javed Hassan, founding chairman of the Economic Advisory Group. “Even if that is removed and Pakistan successfully concludes the IMF review, the risk of default within the next 6 to 12 months will persist.”

Pakistan regularly spends beyond its means and is therefore heavily dependent on foreign borrowing, leading to periodic crises and bailouts from the IMF and other donors, analysts say. bilateral loans led by Gulf countries and China. Pakistan’s total debt and external debt stands at around $100 billion.

The repair of relations with the IMF will pave the way for Pakistan to mobilize more financing from other bilateral lenders, continue to repay debt and pay for energy purchases this year.

However, Islamabad’s relationship with the Washington-based multilateral lender soured last month when Dar appeared to downplay their importance. “I don’t care if they come or not,” the finance minister said, referring to the lender’s ninth review that has yet to be completed. “I don’t need to beg in front of them.”

The bitter conflict between Sharif and Khan’s fiercely opposed political factions exacerbated the economic crisis. Khan last week called for an early election and his Pakistan Tehreek-e-Insaf party warned of the dangers to the economy.

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