Pakistan achieved a significant breakthrough by signing a new nine-month Stand-By Arrangement (SBA) deal with the International Monetary Fund (IMF) worth $3 billion (SDR 2.25 billion) on Friday.
The development is being seen by many as a major positive for Islamabad that ran from pillar to post to meet conditions of the Washington-based lender only to see an incessant delay on a successful completion of the ninth review.
Experts reiterated that being under an IMF programme is crucial for Pakistan’s economy, which is reeling from crisis with foreign exchange reserves at only a month of import cover.
The announcement on Friday was celebrated by analysts and economic experts.
Former finance minister Miftah Ismail, who managed to reach a staff-level agreement with the international lender last year, congratulated the government especially Prime Minister Shehbaz Sharif.
“As I have been saying, a deal with the Fund is the best insurance we have against default,” said Miftah in a tweet post.
“Now InshaAllah the clouds of default will recede, demand for hoarding dollars will slowly decrease, and there will be renewed hopefulness and vibrancy in the business climate,” he said.
The former finance minister said the authorities must recognise that the new IMF programme provides Pakistan a chance for making fundamental reforms.
“Unless we undertake these reforms, Pakistan will remain at the mercy of multilateral lenders and the people will continue to pay for the structural and governance failures of their governments,” he added.
Meanwhile, another market expert said uncertainty has now reduced.
“This new programme is far better than our expectations,” Mohammed Sohail, CEO of Topline Securities, commented on the new programme.
“There were a lot of uncertainties on what will happen after June 2023 as there will be a new government coming to power. Now, this funding of $3 billion and for nine months will definitely help restore some investor confidence,” he wrote.
Similar views were expressed by Arif Habib Limited, a brokerage house, in a report on Friday, terming the SBA signing “as a significant and positive development, given the heightened concerns surrounding the short-term external account outlook”.
“This strategic move to secure a short-term programme not only provides a well-defined framework for economic decision-making over the next two to three quarters but also ensures that the caretaker administration, slated to assume power prior to elections in Nov’23, will have a clear policy roadmap to follow.
“By doing so, it ensures a smooth transition of economic policies during this transitional period,” AHL said.
The new facility also unlocks access to capital markets for Pakistan, opening up avenues for lending as it looks to finance its external funding gap.
“Saudi Arabia, UAE, and other bilateral and multilateral funding will now come in after this new deal helping depleting FX reserves,” said Sohail.
“In fact, there will be some discipline until December 2023, which could not be there due to upcoming elections (where the government takes popular measures) if Pakistan had successfully or unsuccessfully completed this EFF.
“It’s a blessing in disguise,” he commented.
Experts were of the view that the SBA agreement is expected to boost the local currency in the short term.
“However, we expect any recovery to be temporary due to the anticipated opening up of forex markets and the easing of import restrictions, which will exert pressure on the currency,” AHL said.
“It is highly likely that energy sector reforms, including tariff hikes, will be implemented to address the circular debt issue,” added the brokerage house.
Similarly, the stock market is also expected to get a boost as the SBA would offer a clear direction for economic policies and allows investors to make informed decisions.
“Local stocks that trade at unbelievably low Price to Earning (P/E) of less than 3X may rally on this new deal. Benchmark index that is hovering in band of 40,000 to 42,000 may break this level and go near 44,000,” commented Sohail of Topline Securities.
On the other hand, experts remained concerned over the long-term economic path of Pakistan and have called for reforms.
“The authorities need to bring in economic reforms,” said Abdullah Umer, a market analyst.
“Moreover, if the domestic and external debt is restructured or re-profiled, this will provide a sustainable footing to the economy in the long term,” he said.
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