Picking the right lender(s)

With every passing day the ambiguity of entering into a fresh IMF programme increases. The international media coverage suggests that Pakistan is eyeing to replace IMF by China’s bailout this time around. The Chinese help is evident as it has already been helping for fiscal and external cushion for the past eighteen months.

The country has put too many eggs in the Chinese basket; and the reliance is growing every month. Chinese public and private sectors extended around $10 billion debt to Pakistan public and private sector in the past two years. In FY17, the money flew in for other than external support; but the picture changed in FY18 where the majority of estimated $5-5.5 billion were for balance of payment cushion.

And the story continues to date. Yes, there is an inherit commitment of Chinese to bail Pakistan economy out lately. The burning question today is the same which was covered 14 months ago (19th July, 2017) in this section i.e. Pakistan comes knocking to IMF?

At that time China started for balance of payment support to Pakistan and since then the money kept on flowing to keep water just below the nose level. One option is to continue living on the edge; but as the upcoming Finance Minster rightly pointed out that, even big companies have clear idea of future cash flows, how can a country run on monthly support.

The trend has to change; and Asad is clear on securing at least $12 billion by September end (six weeks for him after assuming office). Mind you, that is not enough for full year requirement. It may give a breathing room till March 2019 and then another mini bailout would probably be required.

The good news is that the impact of currency depreciation, monetary tightening and other measures to curb trade deficit has started to show. The imports based on PBS number are down by 15 percent (m-o-m) in July to $4.8 billion. The number is much better than previous three months average of $5.5 billion.
The weekly foreign exchange position is healthy of late. Since 20th July, the SBP reserves sharp downward flight is arrested as the reserves are up by $1.35 billion is the last two weeks versus an average $200-250 million weekly fall for previous many weeks.

Is this to do with general election results? Is the money coming in hope of Naya Pakistan? It is too early to form an opinion; but there is no major inflow apart from $1 billion Chinese debt. There must be slowdown in current account deficit. The CAD suddenly jacked up in the 4QFY18. The monthly average was $1.9 billion versus $1.4 billion in the previous quarter.

The panic button was triggered which was visible from higher outflows in other current transfers and similar heads. It was implied that profit repatriation soared, the households and firms started shifting their savings in foreign currency and exporters were not bringing back full proceeds to home.

There was clear anticipation of further currency depreciation which took place twice since June. Lately, the vibes have changed and anecdote suggests that money is flowing back which is also visible from market based appreciation in the currency.

The CAD is likely to come down to around $1.2-1.4 billon per month which means a deficit of $7.8 billion in Sep18-Mar19. The debt repayment due between Sep-Jun is $5 billion; so let’s assume $3.5 billion is due between Sep-Mar. Adding the two makes the funding need at $11.3 billion while conservatively $1.5 billion will be covered by the FDI.

Thus, if Asad procures $12 billion by September end, he would easily manage to move up the reserves by around $2-2.5 billion from current $10.3 billion. However, that should not be his goal. The need is to further correct the external imbalances, especially by boosting exports and imports substitution. If the PTI is able to fulfill its promises; the FDI and exports boost would be enough to nullify second round of bailout post Mar19.
It is a highly optimistic scenario; but worth waiting to see the first 100 days efforts of Imran and his PTI team.

What are the options to arrange $12 billion in six weeks? Without the IMF it’s hard to get good sum of money in one go. Chinese style of bailout is to keep on giving just enough; but by doing so there is no room for PTI to bring fiscal and other reforms which are imperative for lowering CAD in medium to long term.

Then there are questions on the conditions of Chinese loans. And there are strings attached to Saudi help too; similarly Pakistan has to run US agenda in case of IMF bailout. Any other bilateral source (Russia, Japan etc) won’t come without any agenda. And WB and ADB money is hard to come by without IMF nod.

Borrowing from anyone would come with economic and political costs. That is why Asad should try his best to bring structural changes by March 2019 to reduce the foreign funding needs thereafter; if these cannot be eliminated. The best hope for now and then is to bring in the money from Pakistani Diaspora by issuing bond and other innovate solutions. Apart from it, every other debt based dollar comes with a hidden cost.