External debt: IMF says Pakistan to face amortization of about 4 percent of GDP

ISLAMABAD: Pakistan will face external debt amortization of about four percent of GDP in 2021, said the International Monetary Fund (IMF). The IMF in its latest report, "Regional Economic Outlook, Middle East and Central Asia" stated that the region will face external debt amortizations of about $45 billion in 2021, most of which correspond to sovereign debt service.

In particular, Tunisia will face external amortizations of more than seven percent of GDP, while Bahrain, Georgia, Pakistan, Qatar, and Turkmenistan, will each face external amortizations of about four percent of GDP. The Fund has projected current account balance at negative 2.5 percent of GDP for 2021 for Pakistan against negative 1.1 percent in 2020, and total gross external debt at 41.9 percent of GDP for 2021 against 43.8 percent in 2020.

The report has projected Pakistan GDP at one percent for 2021 for Pakistan against -0.4 for 2020. Further, consumer price inflation has been projected at 8.8 percent for 2021 against 10.7 percent in 2020. Broad money (M2) growth has been projected at 14.3 percent for 2021 compared to 17.5 percent of GDP in 2020.

The report has projected government net lending/borrowing at negative 7.3 percent for 2021 against negative 8.6 percent in 2020. Exports of goods and services have been projected at $28.8 billion for 2021 against $28 billion in 2020, while imports of goods and services have been projected at $54.3 billion for 2021 against 50.7 billion in 2020.

Partly reflecting these measures, first quarter real GDP for the Middle East, North Africa, Afghanistan, and Pakistan (MENAP) contracted by five percent year over year and, while remaining positive, growth for the Caucasus and Central Asia (CCA) declined to three percent year over year.

Although purchasing managers' indices have shown somewhat of a rebound in recent months, indicators remain subdued broadly around the expansion threshold. The report further stated that remittances in Pakistan have so far bucked the trend on the back of strong flows from the United States and increased usage of formal remittance channels.

Recent data are not available for fragile states, but the impact will likely be sizable for countries such as Yemen and Syria, which depend highly on Gulf Cooperation Council (GCC) remittances. These declines, in turn, could have a sizable impact on poverty and inequality.

With the exception of Bahrain, trade balances for several countries improved (Pakistan, Tunisia, Uzbekistan), as activity collapsed and imports were compressed. Although export declines during the first half of 2020 were sizable and ranged from one percent of GDP in Pakistan to nearly four percent of GDP in Uzbekistan, import compression was of the same or even larger magnitude.

Central banks in the region have also deployed monetary and financial policy, including unconventional tools. In countries with flexible currencies, the exchange rate was allowed to act as a buffer, with depreciations in mid-March, which have since partially reversed.

Among pegged currencies, those of most GCC countries (with the exception of Oman) fared relatively well compared with during previous oil shocks, supported by bond issuances and the rebound in oil prices. By the end of August, most central banks had cut their policy rates. Those with pegs, managed floats, and crawls cut rates in line with the Federal Reserve.

Cuts were especially deep in Egypt and Pakistan, by a cumulative 300 and 625 basis points, respectively, with Egypt reducing its rate by a further 50 basis points at the end of September. Half of the region's central banks supplied additional liquidity to the banking system, totaling more than $40 billion.

Central banks also deployed many instruments to boost lending, including cutting the reserve requirement ratio, encouraging loan repayment moratoriums, introducing repo arrangements, providing liquidity support for lending and loan guarantees, and lowering the cost of refinancing.

The Central Bank of Azerbaijan opened a bilateral swap line with the European Bank for Reconstruction and Development. Projected reserve coverage remains generally adequate, at more than four months of imports for most countries, as lower imports compensate for reserve losses.

However, attention is warranted for the few countries where reserve coverage is projected to be quite low (Bahrain, Djibouti, Pakistan, Sudan, and Tunisia). Pakistan and Somalia have been the exceptions so far, showing resilient remittances because of a mix of idiosyncratic factors such as migrants benefiting from the payroll protection program in the United States, to increases in the use of formal remittance channels because of obstacles the current crisis poses to sending money through informal means (flows not previously captured in official statistics).

The new extreme poor would be overwhelmingly represented by fragile and conflict-affected states such as Sudan and Yemen (about 57 percent of the new extreme poor) and other countries that rely on remittances, such as Egypt, Pakistan, and Uzbekistan.

"These results are likely lower bounds for the worsening in monetary poverty and inequality in the short term because they reflect only the immediate remittance channel," according to the report. The economic fallout of the pandemic is expected to result in the largest output contraction in the past 20 years for most countries in the Middle East, North Africa, Afghanistan, and Pakistan (MENAP), and the Caucasus and Central Asia (CCA) regions.

In Pakistan, the authorities are developing digital infrastructure to better identify households for targeted support. The National Socio-Economic Registry is underway to collect household data on socioeconomic conditions at the grassroots level. Once completed, new data about people's socioeconomic conditions will be used in the provision of all benefits.

In addition, the one-window registry Ehsaas-Emergency Cash Program for social protection and livelihoods has been developed to assist beneficiaries and reduce duplication and abuse.

Copyright Business Recorder, 2020