Low inflows of external financing

The first quarterly review of the IMF (International Monetary Fund) Stand-by Facility has been successfully accomplished by the Government. The efforts of the caretaker Government to adhere to the agreed reform agenda and to meet the targets must be recognized.

However, the IMF Staff Report on the Review has included the following statement:

‘Timely disbursement of committed external support remains critical to support the authorities’ policy and reform efforts’

This is an important show of concern on the level of inflows of external financing into the country. It is necessary to understand why the IMF has expressed this concern.

This requires, first, an estimation of the financing needs from external sources of Pakistan in 2023-24. This has then to be seen in relation to the likely magnitudes of different types of inflows during the year, starting with the actual level of inflows in the first quarter of the on-going financial year.

The approach to quantifying the external financing requirements involves estimation of the following in 2023-24:

• The current account deficit in the balance of payments

• Repayment of external public debt

• Targeted build-up of foreign exchange reserves.

The IMF Staff Report on the commencement of the Stand-by Facility in Mid-July included the first estimates of the above magnitudes.

The current account deficit has been projected at $6.4 billion in 2023-24, while the total debt repayment is estimated at $8.5 billion, net of likely roll-overs. Also, the year is expected to close with the foreign exchange reserves at $9 billion, representing thereby an increase of $4.6 billion in relation to the level at the end of 2022-23. Therefore, the IMF’s estimate of the total external financing requirement in 2023-24 is $19.5 billion.

How does the IMF see the financing of this large requirement? The first is non-debt creating inflow of foreign direct investment into Pakistan. The expectation is only of a marginal inflow of $493 million. Last year the repatriation of profits by the multi-national companies in Pakistan was severely restricted and this has created negative perceptions about investment in Pakistan.

The projected debt-creating inflows include, first, $6.0 billion from private creditors. Flotation of Euro/Sukuk bonds is expected to be of $1.5 billion and net lending by international commercial banks of $4.5 billion. Overall, private sources are projected to meet 30% of the external financial requirements in 2023-24.

The remainder, $13.5 billion, is to be met by inflows from multilateral and bilateral creditors. This includes $3 billion from the IMF in the Stand-by Facility. The development banks, namely, Asian Development Bank (ADB), World Bank, Islamic Development Bank (IDB) and the Asian Infrastructure Investment Bank (AIIB) are expected to disburse $7.2 billion as project and programme financing in 2023-24. In addition, bilaterals, including Saudi Arabia and the UAE, are projected as making time deposits with the SBP (State Bank of Pakistan) and some oil financing of $3.6 billion, according to the Ministry of Economic Affairs.

There was a significant quantum of financing in the immediate aftermath of the commencement of the IMF Stand-by Facility in July. This included almost $1.2 billion from the IMF and $3 billion from Saudi Arabia and the UAE. However, the Ministry of Economic Affairs (MOE) has not reported the receipt of funds from the UAE.

Therefore, $15.3 billion of external inflows are to be received since the initial injection in July. This is where we have the beginnings of bad news. Other inflows in the first quarter of 2023-24 have aggregated to only $1.8billion. The inflow in October was only $318 million.

The development banks have been very slow in disbursement of their commitments. Combined in the first quarter, the ADB, World Bank, AIIB and the IDB have disbursed $597 million, when their commitment for the full year is $5,336 million.

This implies that the inflow is only 11 % of the annual target. Last year, in the first quarter, the loans received from the four development banks aggregated to $2.3billion, 40% more than the inflow in the corresponding period of this year. There is need for investigation of the growing reluctance of the development banks to provide assistance to Pakistan.

The other big gap in external financing is in inflows from private creditors. The target as highlighted above for 2023-24 is $6 billion. During the first quarter, there has been no flotation of Euro or Sukuk bonds and no fresh loans from international commercial banks.

This is clearly a reflection of high-risk perceptions of lending to Pakistan, especially in the presence of the low credit-rating of the country, which has not improved even in the presence of the umbrella of an IMF program.

The third source is from the bilaterals, mostly in the form of assistance for projects. This used to be a big source in the peak period of CPEC (China Pakistan Economic Corridor). The public debt owed to China stands at $14.8 billion as of the 31st of March 2023. During the last few years this source has also dried up. The MOE expects that in 2023-24 bilateral financing will only be the oil financing of Saudi Arabia of $600 million.

Overall, the outlook for external financing to meet the total financing requirement of almost $19.5 billion in 2023-24 is not promising. The current account deficit could be somewhat lower by about $2 billion, given the trend in the first quarter. Also, if foreign exchange reserves are to remain at current levels only then $1.5 billion less will be required. The result will be a reduction in the annual financing requirement to $16billion, which is still a big target.

The concern shown by the IMF is justified. Apparently, contacts have been made by the IMF Staff Mission with some bilaterals. There is need to also motivate the ADB, World Bank and the IDB to meet their commitments fully.

Overall, the risk of a growing external financing gap in 2023-24 is high. Already, following the recent meetings, the IMF has reduced the likely external financing of the budget deficit by Rs 1500 billion. The big fall in external inflows will put pressure on the foreign exchange reserves and contribute to a further weakening of the rupee. Payment is to be made of $1billion on the maturity of a bond in April 2024. This could lead to a further reduction in reserves. We hope that the SIFC (Special Investment Facilitation Council) will come to the rescue and, as indicated, mobilize $25 billion of foreign investment in Pakistan this year.

Copyright Business Recorder, 2023