The economic authorities are burning the ammunition fast to not let the reserves fall in an effort to prolong macroeconomic stability. Foreign reserves are falling on an average of $200-250 million per week since the dawn of new year; and at this speed, within three months, the SBP reserves would fall below critical level of $10 billion (2 months of import cover) to knock the Fund programme.
The question is what is the stability and how can a crisis be averted without compromising the high growth and low inflation combination. It is a difficult question and attaining stability without the nod of the IMF seems next to impossible; and IMF conditionalities would surely challenge the mix of high growth and low inflation.
The situation is more precarious than what the economic authorities are portraying; and there seems to be no alternative solution to tighten the monetary and fiscal policies and let the exchange rate adjust. The incumbents at ministry of finance and the SBP are aiming to keep the reserves around $13 billion for remaining few months of current government.
The idea is to not have too much tightening prior to election and surely the government would not like to enter the fund programme before the upcoming elections. The authorities are relying on timely disbursement of official flows to keep reserves levels intact.
These official flows include around $3.5 billion from World Bank Group and $3 billion from ADB annually. If we get these flows in time; in addition to Euro bond/Sukuk issues, other multilaterals (manly DFID) and bilateral, the shortfall becomes manageable which can be plugged by short term borrowings and rest can be provided by China.
However, the catch is that WB flows are under IDA-18 and they take IMF reports and forecasts too seriously; and may not release the funds if SBP reserves fall below 2-2.5 months of imports ($10-12bn). The problem is that the reserves are approaching the critical levels faster than what authorities might have thought.
Concurrently, the IMF is finalizing its post programme monitoring report which is going to be presented to the Fund’s board. The reports was supposed to be presented in the start of February; but has been delayed by a month. Why the delay? What is cooking?
The catch is in the forecast/estimate of current account and fiscal deficits numbers which would help lenders to assert the macroeconomic stability. Anticipating that numbers won’t be same as they were in the last review, the economic managers at home preempted that and initiated a tightening cycle by depreciating PKR against USD by 5 percent in December and increased the policy rate by 25 bps in January.
But is tightening enough? Well it may not as reserves haven’t stopped falling yet. The authorities initially decided to go to the international bond market again to fetch another $1 billion, having earlier fetched $2.5 billion in December. It remains unclear when does ministry decide to approach the capital market again.
BR Research’s hunch is that the negotiations with the IMF are going on the forecasts and some more tightening measures may well be in line to tone down the report to the liking of authorities. This may result in an emergency call of monetary policy for tightening rates; or currency can be adjusted further or a combination of both.
The government ought to take Fund’s report seriously as apart from $2.5 billion from international capital market, government got another $500 million from ICBC. Where did the $3 billion go? What is the purpose of this borrowing? Is it for balance of payment support, or for financing fiscal deficit and to be used as SBP ammunition for keeping calm at forex market?
It seems like the latter and the objective clearly deviates from what the money we get from IMF for balance of payment. The fund money comes with sterilization; and the conditions the fund prescribes are to control the balance of payment outflows. But the government is using these scarce resources from commercial avenues too generously for the growth momentum by keeping a blind eye on growing challenges.
This process of borrowing for spending can take this government home; but would not be enough to pass full calendar year (2018). In order to enter 2019, without entering into the fund programme, the official flows from WB group and ADB are of utmost importance. Else, the fund programme seems inevitable in the interim period.
Lest assume, we pass 2018 successfully, invariably this expensive debt fueled domestic growth is surely not sustainable and without any other help, IMF programme in 2019 is inevitable. What can be this divine help?
It’s not low oil prices as imports at $55 per barrel oil, keeping everything else constant, would be around $52 billion for FY18 and at $75 per barrel the imports would be at $54 billion.The oil prices do not matter much; the point is that other imports are too high to make oil prices relatively irrelevant this time around.
The elephant in the room is China; and it all depends upon how CPEC flows come in. According to unofficial reports, China funded $4-5 billion external financing requirement in FY17. Can this be continued? If so, we can delay the IMF programme. But in that way we would be entering into an unchartered territory as there is no precedence of Chinese funding for balance of payment.
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