The ebb of external inflows

The Ministry of Economic Affairs has released the statement of May 2023 on Disbursement of Foreign Economic Assistance to Pakistan in the first eleven months of 2022-23. The year 2022-23 started with efforts by the new government to get back to the IMF extended fund facility which had commenced in June 2019, but it had been moribund after March 2022.

The efforts succeeded and the seventh and eighth reviews were completed by September 2022. Consequently, the IMF released $1.16 billion, with the expectation that there would be three more reviews before the end of the programme.

The return to the IMF by Pakistan was seen as a strong message to external financing sources, both public and private, of the credit worthiness of Pakistan. The Ministry of Finance set an ambitious target for external financing in the form of new loans, bond floatations and rollovers of almost $27 billion for 2022-23.

However, despite the presence of an on-going IMF programme, the actual inflow has turned out to be much smaller in 2022-23. Inclusive of roll-overs of $7 billion, the total inflow is $15.6 billion. Therefore, the new inflow of loans is $8.6 billion. This is 36% lower than the inflow of $13.5 billion in the first eleven months of 2021-22.

The big shortfall can be largely attributed to the severe down-grading of Pakistan’s credit rating by the three major credit-rating agencies.

This happened despite Pakistan’s presence in an IMF programme, because Pakistan’s foreign exchange reserves were low and plummeting so much so that by December 2022 they had fallen to $5.6 billion, adequate to provide import cover of only just over month.

The Ministry of Economic Affairs had set the target of external loan inflows, excluding roll-overs, of $22.8 billion. With the total inflow of $8.6 billion up to May 2023, only 38% of the annual target has been achieved.

The largest inflow of $4.5 billion has been received from multilateral sources, including the ADB, IDA, IBRD and AIIB. However, the target for the year from these agencies was $7.7 billion. Therefore, there is a big shortfall even in the inflow of loans from multilateral agencies, which are primarily engaged in project and programme financing.

It is possible that in the absence of rupee counterpart funding due to reduction in the size of the federal PSDP (Public Sector Development Plan) the flow from these development agencies has correspondingly reduced. However, despite this constraint, the multilateral inflow was 5% larger than the inflow last year.

The second largest inflow is from bilateral sources, other than the Paris Club, of $1.2 billion. This is due primarily to the oil deferred payment facility given to Pakistan by Saudi Arabia. There were years like 2016-17 when at the peak of the CPEC (China Pakistan Economic Corridor), the annual inflow of project assistance from China was over $1 billion. It is down now to only $25 million.

The target for flotation of Euro/Sukuk bonds was set at $2 billion for 2022-23. This was based on success in selling these bonds worth $2 billion in 2021-22. Following the big fall in Pakistan’s credit rating, the country’s bonds are at a heavy discount.

Consequently, there has been no flotation of bonds this year. The largest target for external financing was by international commercial banks of as much as $7.5 billion. Here again, there has been a high level of reluctance to give loans to Pakistan, given the low reserves and credit rating. Consequently, only $0.9 billion has flowed in as rollover following repayment to ICBC.

The ebbing of external financing, in the form of loans to Pakistan, has created a very difficult situation for Pakistan. The total inflow of $8.6 billion is less than the total debt repayment to be made to the various sources of $8.8 billion.

This is in sharp contrast to 2021-22, when the net inflow after amortization was substantially positive at $6.6 billion. The first eleven months have seen a fall in disbursement of 47% and a rise in amortization payments of over 25%.

Turning to the external financing target for 2023-24, the Ministry of Finance has demonstrated the same degree of optimism as in 2022-23. Net of rollover, the total target for external inflows is $16.8 billion.

The estimated magnitude of the debt repayment, net of rollovers, is $8.2 billion, thereby implying a large net inflow of $8.6 billion. The big inflows are expected to be $4.7 billion from multilateral agencies, $4.5 billion from commercial banks, $3 billion of new deposits from Saudi Arabia and the UAE, IMF loan for budgetary support of $2.4 billion and flotation of Euro/Sukuk bonds of $1.5 billion.

Prospects for the above inflows have improved following the announcement by the IMF of a nine-month Stand-By Facility for Pakistan of $3 billion. Hopefully, $3 billion should flow in soon from Saudi Arabia and the UAE.

These inflows along with the receipt of over $1 billion, following the IMF Executive Board’s approval in mid-July, should significantly enhance the foreign exchange reserves of Pakistan by the end of July 2023.

The prospects are likely to remain positive in the first quarter of 2023-24. The formation of a caretaker government will facilitate the implementation of the reforms agreed with the IMF in the absence of any political constraints.

However, the withdrawal of physical controls on imports and the resumption of the process of growth in the economy could begin to put pressure on the trade deficit and lead to a process of decline in foreign exchange reserves, unless the exchange rate adjusts sufficiently.

Overall, the first few months of 2023-24 are likely to be characterized by a decline in uncertainty and greater stability in the economy. However, we could be back again to a period of higher uncertainty if reserves begin to fall once again by December as happened in 2022-23. It is of vital importance that the exchange rate policy remains fully market-based.

Copyright Business Recorder, 2023