The external imbalances are growing every week. Pakistan should already be in the Fund’s programme. Had Chinese inflow not happened, the IMF programme could have been a reality in 2017. In the first few months of 2018, the need for external financing, seeing the growing external gross funding requirement, was imperative.
However, the outgoing government did not want to leave with two programmes in one tenure. They kept relying on China and other short term commercial borrowing. Now with caretakers at the helm, external management has become even tougher.
Negotiation of new programme is inevitable in honeymoon period of new government as caretakers do not have the mandate. The government may be formed by mid August and the negotiations should start by end of August. This could mean the programme details and Fund’s board approval by third or fourth week of September. That is three months from now. How will the country sustain at around $10 billion SBP reserves (2 months of goods imports) for three months.
At the pace of $1.9 billion current account deficit (average in April and May), the funding gap is $1.7 billion adjusted by FDI. In terms of debt repayment, June is probably the toughest month as $1.8 billion debt was retiring which takes the gross external funding to around $3.5 billion.
Three weeks are gone; and its brunt is visible as the currency is adjusted, rating agency has changed outlook to negative, stock market tanked and the pessimism is visible everywhere. Going forward, the times are relatively less harsh. But the rough patch will continue.
The debt repayment for July and August combined stands at $1.6 billion and is a cumulative $4 billion in subsequent nine months. Mind you, with increasing reliance on debt, especially, short term, repayment ought to increase from published numbers.
Focusing on July and August, the gross funding requirement, assuming $2 billion of monthly CAD, stands at $2.5 billion. The CAD should taper a bit in June as the impact of currency depreciation in March and June has to have its impact going forward.
But the CAD decline cannot be much without taking additional measures - the petrol prices need to increase, non-tariff barriers for non-essential imports should be imposed by enhancing cash margins on L/Cs.
Apart from import curtailment, subsidy should be given for cement exports and other non-traditional exports. The profit repatriation by MNCs and others which has significantly increased in the last two months will come down when the trade balance starts improving.
All these measures, along with further debt accumulation from China and other short term commercial borrowing, may let reserves to hover around $10 billion mark till the country enters into the Fund programme. Once, in the IMF hands, the other IFIs (WB, ADB, IDB etc) will come in too. The ratings may improve to open the conduit of getting money from global debt market.
The Fund will come up with its own stabilization policies to curtail fiscal deficit and to rationalize energy prices and remove distortion in tariffs. This may squeeze growth momentum; and the steps required in caretaker time to float till the time of signing of IMF programme, would already have been squeezing growth.
Thus, there is no option but to comprise growth momentum. The important question is what amount the IMF would be extending to Pakistan and would that be enough for the country to sustain in medium term. The gross funding requirement for FY19 is going to be $23-25 billion adjusting for short term loans which are assumed to rollover anyways.
An FDI of $3 billion and $6 billion from IFIs may cover $9 billion. This will leave another $14-16 billion. How much of it is to be funded by the IMF? The country’s existing debt with the IMF is around $6 billion and its quota is around $3 billion. Rumors are that the Fund will approve around 400 percent of quota; this means an additional $6 billion.
That is simply not enough to avert crisis in FY19 and FY20. Or else the reliance on China and short term borrowing would increase in coming years. Argentina got $50 billion loan approval from the IMF which is 1100 percent of the country’s quota. Pakistan needs to press for at least 600 percent of quota which implies total IMF funding at $18 billion and fresh lending of $12 billion.
Seeing the lack of eagerness of last government (PMLN) and upcoming possible government (PMLN or PTI) to show signs of negotiations before election is not conducive for a healthy programme. The country should have negotiated earlier to avert today’s situation.
Had the Miftah and Abbasi duo, entered an IMF programme, the IFIs flows would not have stopped, the global capital debt market could have welcomed Pakistani bond. But that never happened. Today, the caretakers should have been doing homework with 2-3 scenarios of conditions and loan size, and both Miftah and Asad (possible FM in next government) should be working on those independently and should be meeting the Fund to work on possible plans.
And once the new government is formed, the team should be hitting ground from day one. But no one wants to be seen talking to IMF as it may lower the chances of winning elections. That is a sad reality; and economic growth and stability are the causalities.
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