External financing Plan B

There are no two ways on the fact that Pakistan needs additional$7-8 billion in SBP reserves within a couple of months, apart from seeking support from friendly countries. The obvious plan A is to enter into an IMF programme. But there has to be a plan B for jacking up SBP reserves by using smart financial techniques.

It is pertinent to note that for external account stability, the world primarily sees a country's central bank reserves, rather than evaluating the overall country foreign reserves. Hence, some smart accounting treatment can be used to pass on some of the banking reserves or other liquid assets to the SBP reserves.

Pakistan has requested the Fund for a bailout package of $8 billion last week and the IMF team will be visiting on November 7 for the first round of negotiations. However, it is not certain that the Fund would entertain without asking for some undoable conditions. The US state department spokesperson lately said that “We will examine closely all aspects, including Pakistan debt position, in evaluating any loan programme"

One may argue that how can the US with 16 percent voting rights on the IMF board can politically influence the decision in bailing out a member country. But seeing the dynamics of global politics, anything is possible.

It will take at least 8-10 weeks from now to get the first tranche from the IMF, if the programme is successfully signed. The pressing need is to have a plan B,

concurrently for better negotiations with the IMF. And this plan is imperative if the IMF programme is off the table for non-financial reasons.

An out of box thinking is required by the country's economic team. Asad needs to take clue from what Manmohan Singh did in India in 1991; and the Indian economy took off to a different trajectory. At that time, India was struggling to finance its essential imports, which is the case in Pakistan today.

The Indian government airlifted its gold and pledged it to global central banks and IMF to fetch much needed foreign exchange reserves. Pakistan can do a similar exercise today. The SBP has $2.7 billion of gold deposits which are not reflected in SBP liquid foreign exchange reserves.

The government can request China's central bank to pledge the gold to get liquid reserves in return. If there are procedural frictions in the transaction as gold has to be airlifted; government can ask two commercial banks of China operating in

Pakistan to pledge the gold. The SBP can easily get $2.5 billion by this transaction which can be executed within weeks. There are other low hanging fruits where the country can altogether get $7-8 billion in SBP reserves without direct help from friendly countries or reaching out global debt markets.

The FE25 deposits' total value as of Sep18 was $7.4 billion, out of which almost all is deployed here or there, but $1.4 billion is kept by SBP in cash reserve requirement ($381mn) and special cash reserve requirement ($1,052mn). The SBP can convert $1 billion in SCCR to statuary liquidity requirement (SLR) by issuing mandatory bonds to FE deposits holders. This way, the $1 billion would move from FE25 to SBP liquid reserves and this transaction can happen in a day.

Combining gold pledge and SLR on FE25, SBP reserves can increase by $3.5 billion without any fresh borrowing out of the system. This will give some breather to the government; and it should start working on some other low hanging fruits.

The government can conservatively raise $2 billion from securitization of home remittances. In FY18, the remittances from KSA and UAE were $9.2 billion which is routed from 4-5 banks of these countries. The government can reach out to these banks to securitize the remittance inflows to easily get $2 billion loan for five years.
Adding this, the sum becomes $5.5 billion. Apart from this, the government can conveniently fetch $500 million by pledging PIA's shareholding in Roosevelt Hotel.

Then there are additional telecom spectrums up for sale where government can raise $1 billion by allowing the spectrum proceeds only in USD.

Another way is to use the data of Pakistanis holding overseas bank accounts which are declared in amnesty scheme. The SBP can launch a local USD bond for them to bring some funds to Pakistan.

Adding all the flows, SBP can get $7-8 billion; out of which $3.5 billion can come in the central bank account within 2-5 weeks while the rest can be fetched within 2-3 months. This should be Asad's plan B.

After plan A and B are implemented to bring stabilization, the government can up with other options such as Diaspora bond, Euro and Sukuk bonds, selling National Bank holding in AL-Jazira Bank, secondary public offering of OGDC, fight $800 million from Etisalat on pending PTCL deal, and of course help from friendly countries.

Simultaneously, the government should work on improving foreign investment climate. A good start could be to give highest priority to completion of sale of K-Electric by Abraaj to Shanghai Electric. This could be a huge confidence booster to both domestic and foreign investors.