The IMF’s first post programme monitoring was finally conducted earlier this week, and a press release was issued in the context which is to be followed by a detailed report in a couple of weeks. The PPM is delayed by at least a month as country’s economic authorities are still trying to come in good (or not so bad) books of the IMF.
The IMF’s post monitoring report is the bible for other multilaterals and rest of the creditors (barring China) or investors, as they see the Fund’s finding as a basic tool for decision making. The Fund in its previous programme was deemed to be too lenient on Pakistan as experts perceived that US political clout on Fund’s board was paving way for softer stance on Pakistan as the country was a key US ally in Afghanistan war.
But lately, when the economy started to grow at 5 percent with low inflation, especially after completion of IMF’s programme, policies started to be misaligned to the US interests. The easy growth story proved to be short lived. Both current account and fiscal accounts started slipping in FY17 and slippage persists in FY18 - the growing current account deficit is causing short to medium term problems while the fiscal imbalances are yet again proving to be the root cause of macroeconomic instability in the long run.
The drop in reserves is too steep as the IMF’s PPM approaches and the need to raise external funds from left right and centre is becoming an immediate need. In the past few quarters, reliance on expensive commercial debt (both short term and long term) has increased which will stress debt servicing soon and will exacerbate fiscal problems.
The WB group and ADB have tightened ropes on the release of official flows to Pakistan which are of utmost importance in the short term. The government went to international capital market and picked $2.5 billion dollars in Euro and Sukuk bond in Dec and the money was consumed in weeks; and now the hike in international interest rates is making government to think twice on raising further money from the same avenue.
Thus, the IMF report is of utmost importance for fetching cheap or concessional external loans. And deteriorating relations with the US is making the objective more complicated. Thus, the government deliberately bought a month from the Fund to show some efforts in correcting the macroeconomic framework and political correctness.
The currency was depreciated in Dec followed by unexpected policy rate hike of 25 bps in Jan. And all of a sudden, talks on privatization of PIA and PSM have started surfacing, no matter how distant they maybe. Despite all of it, reserves kept on falling - on average reserves have dropped by $200-250 million weekly in last eight weeks.
These measures along with some actions on militancy to appease the US, especially after FATF fiasco, yielded in toning down the Fund language and its forecast.
In its press release, the fund forecasted the SBP reserves to be at $12.1 billion (2.2 months of import cover) by June end. This means the reserves would not fall much from current level of $12.3 billion. The fund expects CAD to stand at 4.8 percent of GDP ($16.2bn). This means the CAD would be $7 billion in Feb-Jun and the debt repayment for the period is around $2.5 billion. From where will $9.5 billion be funded till June? The numbers are simply not adding up. The Fund has once again shown leniency and that might be an indication that official flows from western multilaterals may materialize.
Anyhow, the IMF is critical on the slippage of fiscal deficit and it seems that next programme which is expected to start in six months may have more emphasis on curtailing fiscal deficit. This implies that there would be slowdown in infrastructure induced growth momentum soon.
Comments
Comments are closed.