The struggle to keep foreign reserves intact is getting difficult day by day. After a fall of $358 million in third week of February, the SBP reserves are reduced to a mere 2.75 months of imports assuming $4.5 billion monthly (annual: $54bn) imports of goods. The critical level, beyond which financing would become extremely difficult is 2.5 month of imports or SBP reserves at $11.25 billion.
If the imports of services are added, the monthly toll of imports would reach $5.3 billion and based on that, import cover is a mere 2.3 months at this point in time. Since the WB and ADB look at goods and services imports both, according to their lens, the import cover is already down from critical level of 2.5 months since the start of February.
That is why western multilaterals have already tightened their hands on the release of so called official flows which the SBP is relaying on. That compels Pakistan to put virtually all the eggs in one basket (China) before the IMF comes at the helm of affairs.
Had China not been generous in lending to Pakistan lately, the country would already have been under the Fund’s programme. The external debt form of support from China was around $5 billion in FY17 and it has provided another $1.6-1.8 billion so far this fiscal year. The Q block is whispering of another $1-1.2 billion commercial loans from China, which is in addition to another $1 billion raised from Chinese banks in the last three months.
Since the global interest rates are rising, the new debt would be a little more expensive than what was procured earlier. News reports suggest that higher indicative rates stopped the ministry of finance to go for another planned issue of Eurobond.
Raising Euro bond at higher rates could have been politically incorrect for the government as it happened earlier in November 2016, when the euro bond raised was at premium to previous issue and Dar faced the music from analysts and economists. Given the difference in LIBOR between Dec17 and today, the ten year bond which was fetched at 6.875 percent in December would have cost 7.3 percent today.
The interesting point is that the differential rates on commercial loans from the ICBC would be same as the case of Euro bond. Since it is not a public issue, it may get much less space in press; and is the likely option for the ministry of finance.
Another $1 billion from China would be a breather for another month. What next? The financing gap is no way going to be thinned. The gap is explained earlier - for details read “living off the debt” published on 20th Feb, 2018. To recap, at the current pace, current account deficit would be $6.5 billion for the remaining five months of the fiscal year (at $1.3bn per month) and that has to be financed one way or the other.
The debt repayment is around $2.5 billion in the period which takes the gross requirement to $9 billion. Some of the debt would be rerolled and some new commercial borrowing at high rates would take place. For simplicity, let’s assume all the retiring debt is replaced by rollover over or new avenues, the requirement of $6.5 billion CAD is still too high.
The FDI may bring home a billion dollar seeing the dismal performance in the past few months. Now without $2.5 billion from capital market and $0.8 billion from ADB and WB, how would the rest be financed? Surely, Chinese institution cannot cover this entire gap.
The situation is getting tough - the current government may complete its term without the IMF, but it is hard to pass interim period with Fund’s blessings. But will the IMF negotiate with the interim setup, or China will keep on bailing at a real crunch time.
What are the options that can linger on the current state till the next government assumes office. One is support from China - much more than $1 billion loans from ICBC. Other is deferred oil payment facility from Saudi Arabia. All of this could act as stop gap, before the IMF eventually and inevitably takes control.
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