The IMF (International Monetary Fund) issued ‘Request For Stand-By Arrangement’ in July 2023. The IMF has again produced a foreign currency cash flow projection for the following five years. This is even a better presentation on the same subject compared to the Report issued in 2022 on which the author wrote an article in this paper.
In both the reports, cash flow projection is given in Table 3a on page 35. This table is designed in a particular manner suited for financial experts. As in 2022 the author has reformatted the presentation for the sake of simplicity in the following table.
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Particulars 2022-23 2023-24 2024-25 2025-2026 2026-2027 2027-28
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Goods
1 Exports 28.062 30.843 33.340 35.857 39.005 40.921
2 Imports 53.951 64.700 68.921 73.115 77.632 82.789
3 (1-2) Net outflow on goods (25.889) (33.857) (35.581) (37.258) (39.005) (41.869)
Services and interest
4 Net outflow on services (.445) (1.566) (2.287) (2.789) (3.366) (4.030)
5 Net interest payments (5.596) (5.445) (5.273) (6.109) (6.682) (7.198)
6 (3+4+5) Net outflow on goods services and interest (31.930) (40.868) (43.141) (46.156) (49.053) (53.097)
Remittances and other current inflows
7 Remittances and other current account transfers 27.910 34.444 36.680 39.016 41.768 45.151
8 (6-7) Net shortfall on current account (4.020) (6.424) (6.461) (7.140) (7.285) (7.946)
9 Foreign Direct Investment including portfolio
investment excluding direct investment abroad (1.015) .493 5.838 6.873 8.062 8.901
Government Loans
10 Repayment (11.719) (6.928) (10.023) (13.081) (10.771) (13.055)
11 New Loan 9.700 14.686 15.169 13.988 11.045 12.279
12 (10-11) Net on Govt loans (2.019) 7.758 5.146 .907 .274 (.776)
13 IMF 1.200
14 (12+13 Total movement in government Loans (2.109) 8.961 5.146 .907 .274 (.776)
15 Net other liabilities inflows/Outflow . 575 .236 .765 1.090 1.364 .955
Total Capital account (2459) 9.690 11.749 8.870 9.700 10,632
16 Net inflow/(outflow) for the year (5.993) 3.567 5.444 1.828 2.494 2.716
18 Use for reserves augmentation 5.796 4.926 3.905 1.253 1.122 .484
19 Net use/(excess use) . 197
(1.359) 1.539 .575 1.372 2.232
Total 5.993 3.567 5.444 1.828 2.494 2.716
19 Reserves at beginning 9.821 4.056 8.982 12.888 14.141 15.263
Increase/(Decrease) in reserves (5796) 4.926 3.905 1.253 1.122 .484
20 Reserves at end 4.056 8.982 12.888 14.141 15.263 15.747
20 Loans at beginning 123.574 130.581 139.116 143.719 147.582 150.476
Increase in loans 7.007 8.535 4.603 8.466 2.894
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Each aspect has been discussed in the following paragraphs; however, after reading this table the author is of the view that our position is projected to be deteriorating in the next five years. Furthermore, it appears that the IMF has tried to bring in positivity to the maximum extent but relevant facts do not corroborate these assertions.
Current Account
Current account estimates by the IMF demand serious consideration when compared to what had been projected in 2022. Net deficit on that account has been projected to be less by USD 25 billion. In the author’s view, a positive assertion has been made on the current account, which is fundamentally different from projection in 2022.
In the earlier report, the net current account deficit was on average of USD 11.5 billion. This has been estimated at around USD 6.5 billion in 2023 report. This means that the current account deficit will reduce from the earlier estimate for five years by USD 25 billion.
Even if it is considered that the amount estimated is correct this clearly depicts that the economy is projected to be contracting. It is for this reason that there is an apparent reduction in the value of imports of goods. It is the author’s opinion that estimates for a reduction of USD 25 billion in the current account are not justified and actual figures will be close to what had been estimated in 2022.
For example: imports of USD 88 billion for 2026-27 have been revised downward to USD 77 billion: a decrease of USD 10 billion. The exports for the same year, i.e., 2026-27 estimated at USD 44 billion have been revised to USD 39 billion: a decrease of USD 5 billion. There is an average decrease in current account deficit of USD 5 billion, which accumulates to USD 25 billion over five years. In the author’s view, this is an unrealistic estimate and an over-simplistic proposition.
Furthermore, this proposition is based on an estimated 10 to 15% increase in home remittances. This is by and large in line with the estimates in 2022; however, keeping in view growing alienation among expatriate Pakistanis, the estimate of USD 40+ billion for near future is only an overestimate.
Foreign Direct Investment (FDI)
The most damaging aspect is the estimated foreign direct investment. Under the revised cash flow, the estimated FDI and portfolio investment has been estimated at around USD 25 billion over the period of next five years.
In the earlier estimate of 2022, this amount was on an average over USD 10 billion per annum, meaning thereby an investment of over USD 50 billion in five years. In the author’s article on 2022 figures it was said that there is no possibility of USD 50 billion FDI inflows in the following five years. This view appears to have been validated by figures and facts.
It is considered that for a country like Pakistan an FDI of USD 25 billion is a very small sum. However, based on the situation on the ground and the currency rate, even achieving USD 25 billion in five years will not be possible unless we change the entire political, social, security and economic paradigms. In this context the author is also concerned about IMF’s reasoning for this major change over a period of twelve months.
This change does not emit a good signal because in their own estimates, they have halved the FDI without giving any reason for it. It was clear at that time that the Fund’s projections were not correct and even now it is felt that the revised projections for current accounts are again an overestimate unless there is a fundamental change in the economic structure of the country.
Loans
The most tragic aspect of the current circumstances is dependence on external loans and the consequent ‘Requirement for External Finances”. As per an IMF report, this year, much like in 2022 projections, there is no effective repayment of loans. There is an increase in net loans due in foreign currency from USD 123 billion to USD 150 billion over the period.
The outstanding loans during the period are almost the same, with some differences in the two tables. However, the bottom line is that there is no reduction in loan liability and we will be adding around USD 23 billion to our liabilities over the next five years. This simply means whatever we argue about probable sovereign default, the need for ‘re-profiling’the debt is starkly stated in black and white in a foreign currency schedule.
IMF’s Table 3a also states the funds that will be required in the respective years for settling the debts due during the following five years. This amount, which was estimated at around USD 33 billion on average in the last report, has been reduced to around an average sum of USD 27 billion per annum. There is no apparent reason for this change other than that it is effectively linked with reduction in current account.
The 2023 Report reveals that the IMF has tried to present a better picture for Pakistan, which is good for us. But we will come across many gaps and policy differences if we decide to analyse the issue in detail.
It is apparent that the IMF is trying to demonstrate that Pakistan ‘may be’ able to sustain in a manner that it has been adopting for the past many years. This is a good omen. This presumption is presumably being made to satisfy the ‘creditors’.
The whole story revolves around the saving of USD 25 billion projected import of goods and estimated FDI of USD 25 billion in the following five years. It has been projected that exports will attain a growth of less than 10% on average, which is shameful when compared with India and Bangladesh.
These discussions reveal that the country’s default risk in the forthcoming five years will only increase. This report should be read as a preamble to the next IMF programme; and it clearly shows that in a subsequent programme, certain policy decisions on this matter would have to be taken.
This report is more like a pitch made by a borrower in distress for seeking financing from creditors. To that extent it is good. However, the borrower could face an extremely adverse situation if that is considered to be a real position.
Copyright Business Recorder, 2023
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