Yellow light is on

There seems to be an increasing sense of inevitability on Pakistan going back to the IMF. With every passing week, foreign reserves are falling while Dar is losing control of economy at even faster pace. So the debate is when and not if, Pakistan goes knocking those familiar doors again.

This column has long opined that the currency needs some adjustment as in the absence of foreign exchange earnings, debt based reserves building cannot sustain. As long as the political stability is intact, confidence is high and the relations with the US are not too sour, the IMF would not be too concerned.

The phenomenon has continued from Feb14 to first half of 2017, the stabilization process started from $1.5 billion conditional gift from Saudi Arabia and the IMF kept a blind eye on debt creation. The foreign reserves moved up from the low of $8 billion in Jan14 to $24 billion in Oct16. Out of $16 billion increase in reserves during the period, external debt contributed $14.9 billion. IMF did not bother about contingent liabilities but we should.

However, there were no red flags as the economy started growing at higher pace, CPEC was in full swing and the confidence was restored amidst political stability. Dar was in charge and had IMF’s backing and in turn, that of other multilaterals. The WB and ADB started pouring money for both programme and project lending. And Dar even went to global capital market for bonds.

The trend was unsustainable, but the flow was there. The private sector started investing and planning for expansion and same is the story of infrastructure projects. There was always a threat of soaring current account deficit; but Dar was confident on raising debt while he kept the currency pegged to USD despite the fact that REER moved up from 104.4 in Jun13 to 126.4 in May17.

Dar’s glory was short lived. The political climate started to change right after the Panama papers unfolded. The timings were bad as since Jan17, the current account deficit started heading south. With the PMLN government getting weak, confidence of multilaterals on Pakistan started to shake.

Now Nawaz is no more the PM and Dar no more the chairman of ECC. Lately, the IMF has shown concerns on external vulnerabilities having signaled that the currency needs adjustment. Other multilaterals, including WB and ADB, usually alter their commitments based on IMF’s evaluation.

In the past, they hinged their disbursements on the IMF’s letter of comfort even if the country was not in fund’s programme. The red light is not on yet; but surely the fund is not giving the green signal anymore. Rumour has it that the WB has hinged its disbursement on currency depreciation. The news is not confirmed by the institution, yet the vibes are not positive and the attitude is no more the same.

The reserves are now falling like nine pins, down by $4 billion since Oct16. The trend is more disturbing since May17 end. The SBP reserves are down from $16.4 billion to $14.4 billion in last nine weeks while banks reserves are up from $4.8 billion to $5.6 billion.

Both the indicators are not healthy for stable currency as the SBP is extinguishing its ammunitions fast to not let the currency find its equilibrium. On the flipside, FE25 deposits (banks reserves) are moving up at an unusually high pace which is implying that expecting currency depreciation is expected soon as they have started converting their savings into foreign currencies.

Let us see how the story unfolds in coming weeks, as it seems that the IMF’s yellow light is on. It is just a matter of time before it turns red.