THIS was the year Pakistan came closer to a catastrophic default than any other time, and pulled back just in time. The first half of 2023 was defined by the approach to default, fears of which peaked in June. The second half of the year was defined by pulling back from the brink, which began in July with the commencement of a rapidly negotiated and sudden IMF programme.

That IMF programme stands as a summit of uncertainty in the middle of the year, flanked on either side by a graph rising towards catastrophe in the first half, and descending away from it in the second.

This was not the country’s first brush with default. The months immediately following the nuclear detonations of May 1998 until the Standby Arrangement negotiated with the IMF which began in November 2000 were also marked with default fears. The months leading up to November 2008 were another such period, although overt fears of default on sovereign external debt were not as pronounced in that time as fears of a full-scale financial sector meltdown.

What made 2023 different was the sheer lack of interest on the part of the outgoing PDM government to tackle the underlying issues that were driving Pakistan towards default, as well as its outright refusal to do what was necessary to stay in the IMF programme that was resumed under its watch in August 2022. Miftah Ismail’s ouster from the finance ministry and replacement with Ishaq Dar was the trigger. Dar’s stubborn refusal to let the rupee devalue in the face of the serious erosion of foreign exchange reserves became a key sticking point in the review of the troubled programme. As a result, the programme stalled, disbursements from the Fund were halted, all other associated inflows stopped in consequence, and the country careened dangerously close to a default on its external debt service obligations.

While default was staved off in 2023, inflationary pressure remained high.

The first half of the year was spent in conversations about a default. Will it happen? What does it mean for the country if it does? How much will day-to-day life be impacted in the event of a full-scale default?

The Sri Lanka situation

Pakistan learned more about Sri Lanka, its history, economy and politics, in the year 2023 than it did in all preceding decades. The name Sri Lanka became synonymous with a “situation” and the question “are we headed towards a Sri Lanka-type situation?” became ubiquitous, on the airwaves as well as the drawing rooms.

Along with questions about Sri Lanka, the country learned to ask searching questions about “debt restructuring”. The country’s credit rating had been plummeting all through 2022, and in September of that year Moody’s issued a cautionary note about the possibility of debt restructuring in Pakistan. From that point on, the credit rating fell into junk territory, with all issuers rating the possibility of a default as high. The year 2023 opened in the shadow of these rating actions, which hit rock bottom in the months after February 2023, when all rating companies downgraded Pakistan to the lowest credit rating the country had seen in decades.

The surprise Standby Arrangement with the IMF came in June, and the programme commenced in July. Almost immediately the prospects of a default began to fade. Details of the programme showed it was designed to basically arrest the country’s slide into financial unviability. The end programme targets were all far more relaxed from those given in the Extended Fund Facility that came to a troubled and inconclusive end in June 2023. The Fund was basically asking Pakistan to go into a holding pattern for nine months, while the country sorted out issues connected with the holding of elections. The programme was scheduled to end in April 2024, only a few days before the maturing of a major billion-dollar bond. It had two reviews embedded with it. One review would take place at the beginning of the interim government’s tenure. The second one at the end. The facility would pave the way for a successor programme that is expected to come almost immediately after the Standby ends. And with that programme the path of structural adjustment and serious macroeconomic stabilisation is set to resume.

Uneasy stability

Until then the country found an uneasy stability under an interim political set-up that began in August 2023, and a Standby Arrangement of the IMF that began a month earlier in July. Both regimes are interim in nature and designed to accomplish very limited, and very specific purposes. The interim government is mandated to hold elections, and the Standby Arrangement is designed to ensure the country does not drift into a default at a time when it is preparing for an important transfer of power.

But around July another development began to exert its own influence over both of these transitory regimes. The announcement of the creation of a Special Investment Facilitation Council, with participation from the office of the chief of the army staff, captured the imagination of the country’s investors as well as its creditors. In meetings with the business community, the army chief reportedly conveyed the message that large-scale flows of foreign exchange were about to commence from the Gulf countries and the Kingdom of Saudi Arabia, and even an amount of $25 billion was apparently attached to the expectation.

The claims were published in newspapers and carried by television news broadcasts, and prompted questions from the country’s creditors because it seemed as if the interim leadership of Pakistan was banking on arranging a very large injection of foreign exchange with which to restore its tattered reputation among foreign investors, and kick-start economic growth after a calamitous two years in which the economy stalled and inflation spiralled like a prairie fire.

Peaking dollar, high inflation

With the inauguration of the interim government, and the IMF Standby, some stability began returning to the economy. Massive price adjustments were made along the way. The rupee stood at 225 to a dollar when the year opened, hit a peak of 307 in September as the IMF-mandated “market-based exchange rate” was ushered in, then retreated again to 281 by December. The retreat was the result of massive clampdowns on cross-border trade, along with fanning hopes of a huge inflow expected imminently from the Middle East. Power tariffs were hiked considerably in July, prompting street protests in September once bills containing the revised tariff were delivered. Gas prices surged in September in an attempt to contain the growth of the gas circular debt. With each hike, and the devaluation of the rupee, inflation surged.

As 2023 drew to a close, inflation was refusing to come down, despite massive monetary tightening by the State Bank which took interest rates to a historic high of 22 per cent in 2023. Inflation plateaued out around 30pc by November of 2023, but the expectations of the State Bank that it would decline have not yet materialised. The interim government ran a tight fiscal ship, keeping spending under control, which helped in reducing the growth of domestic debt. And the erosion of the foreign exchange reserves slowed considerably from July onwards. The months in the second half of the calendar year saw the return of nascent stability around a very low growth equilibrium. But the expectations of a massive infusion of foreign exchange and the reduction of inflationary pressures had not yet materialised.

The spirited application of the Standby Arrangement’s conditions, especially regarding energy prices which began to be adjusted upward from July onwards until November, boosted earnings of energy related companies, many of which are listed enterprises. As a result, one unexpected byproduct of these adjustments was a jolt to the PSX 100 index on the stock market, since many of these energy companies carry large weight in the index. Coupled with energy stocks, banks reported their most profitable quarter in the July to September period as well, on the back of earnings from high interest rates that had hit record levels in the first half of the calendar year. Banks and energy companies powered a surge in the stock market that began in July until it finally hit its zenith in December. In six months, the stock market registered a surge of 50pc, a rare occurrence.

The year ended with stability returning, but uncertainty continuing to haunt the outlook. The key questions swirling around the economy were whether or not elections would be held on time, how credible would their results be, how willing would the next government be to quickly seal a successor facility with the IMF, and whether or not the SIFC would deliver in the way it had been promoted. Calendar year 2024 will be the year in which these questions will be definitively answered. But the return of growth still seems, at this point in time, to be a very distant goal.