The forced prior action of the State Bank of Pakistan as per requirement of the International Monetary Fund to purchase 375 million dollars (ie, 250 million dollars spent by SBP to defend the Pakistan currency prior to June 30, 2013 plus 125 million dollars) to propel the reserves. That this action by the SBP unhinged the PKR and its parity slid to 110 to a dollar in a matter of days was a development that should serve as an eye opener for both the Fund and SBP about the depth of the local forex market. The Extended Fund Facility (EFF) was solicited to provide help in repayment of our existing loans to multilateral institutions, especially the IMF and to bolster "market confidence and catalysing additional financial support from other development partners and private sources."
The Fund board and the staff know well that it would take six to nine months for disbursement of programme loans. It would also take the same time for Pakistan to tap the international bond market. Still the programme disbursement schedule aims at releasing around 545 million dollars per quarter while the country is required to pay 875 million dollars in the first quarter of this financial year and again 805 million dollars in the second quarter, inclusive of 720 million dollars, to the Fund itself. As a result, Pakistan's forex reserves are going to dip to cover barely two weeks of imports or less. The Fund's review mission would definitely utilise adjusters provided in the Technical Memorandum of Understanding while estimating the Net International Reserves (NIR) of State Bank of Pakistan and may also do the same in calculation of its Net Domestic Assets (NDA) but market players will panic that the forex reserves are painfully below the target given in the LoI signed with the Fund. As a result, the pressure on the balance of payments (BoP) will aggravate as exporters hold back repatriation of export proceeds and importers aggressively go long on their imports of raw material and intermediary goods and the bank treasuries join speculative forces. This is bound to result in the weakening of the Pak currency. Is this front loading of the programme desirable? The objective of seeking help from the IMF is to buy time to stabilise economy and get the bridge loan for the time needed to reduce economic imbalances and obtain sustained inclusive growth and employment generation. Certainly the aim cannot be to create panic in the forex market, at the end of every quarter. As such the Fund's quarterly disbursement should be aimed at neutralising country's outflows and improve sentiment and confidence. Has this objective been met thus far? No Please consider:
In hindsight, Pakistan's track record shows that it becomes complacent on the fiscal side as soon as it receives help from western powers. Understandably, the Fund this time around has kept Pakistan on a tight rope in its programme. But both sides, ie, the Fund and Ministry of Finance (MoF) need to be very clear on the kind of 'bailout'. The NIR targets in the existing EFF do nothing in easing the BoP of the country. The programme as designed, however, does force a weakening PKR in big spurts leading to inflation.
Surveys do show that Pakistani businesses are more concerned about PKR parity with the dollar than with the lending rates in pricing their goods and services. The EFF review needs to highlight this fact and NIR targets need to be lowered accordingly and quarterly disbursement raised for the first six quarters, ie July 2013 to December 2014, to ease the BoP position. Forcing SBP to purchase dollars every quarter in large amounts from a forex market that has spread thin is definitely not the solution. Volatility in the market on a daily basis needs to be avoided. Both, the Fund and MoF need to learn from experience. PKR's Yo-Yo movement from Rs 106 to Rs 111 to a dollar and back to Rs 106 against the greenback in a day should not happen again! Finance Minister Ishaq Dar and Governor SBP Yaseen Anwar need to address this issue with the IMF's visiting mission. Fund's staffers need to go back to their Executive Board to neutralise forex outflows with quarterly disbursement from the Fund and not force SBP to make huge purchases in the forex market before end of each quarter during the programme. This requires bigger disbursement amount in the first year and tapering towards the end of three years of the EFF. The Fund needs to prove that it works to foster growth and economic stability in an effective and meaningful manner. Since its lending signals that a country's economic policies are on the right track, it needs to reassure investors and act as a catalyst for attracting funds from other sources. Unfortunately, however, investor confidence is still down.