Delay in IMF deal and Pakistan's Dwindling Economy!

Pakistan’s economy is in a state of limbo as practically all sources required to take it out of uncertainty are undecided themselves. Despite all assurances given by official economic managers the IMF agreement looks still far away. Many analysts mention that this is probably the longest delay in finalising just a staff level agreement with the IMF faced by a country.

It is quite obvious that the delay has multiple negative consequences for Pakistan as all financial sources have simply dried up. It has become extremely cumbersome for the economic managers to justify the delay with the incumbent finance minister trying hard to prove his worth and he has been left with no option but to fight for his position.

Even the State Bank of Pakistan is feeling the pinch of this uncertainty and its governor has consistently shied away from giving a date of finalising the IMF staff level agreement though he did not hesitate while forecasting reduction in non-debt creating inflows.

The worry however was clearly evident when the governor SBP painted a bleak external sector picture indicating that the combined inflows, on account of exports and foreign remittances, will be $14 billion to $15 billion less than the budgetary estimates made by the federal government.

SBP governor also mentioned current account deficit projection (CAD) that he gave for this fiscal year, however, was still out of line with the IMF’s forecast as it will be around $7 billion a figure that is $1.2 billion less than the IMF’s forecast though it is in line with the assessment of the incumbent foreign minister.

There are real reasons behind the prevailing negativity as the CAD quantum has a direct bearing on the external financing gap that Pakistan sees at $5 billion but the IMF has projected at $7 billion.

It was however pointed out that the reduction in the CAD is artificial and has been achieved by closing industries and inflicting damage on the people. The CAD has remained $3.8 billion during the first seven months of the current fiscal year and it was down by 68%. The SBP
confirmed this fact by stating that the economy continues to depict signs of a policy-induced slowdown, mainly in response to monetary policy tightening and administrative measures to counter inflationary pressures and address external challenges.

The governor was rather reticent about the fiscal policy though tried to maintain that imports will be opened but only after the completion of the IMF’s 9th review. He insisted, however,
that the banks were ensuring the provision of dollars for essential imports, including medicines, edible oil and fuel imports. He quickly added that the foreign debt-creating inflows will start picking up after the revival of the IMF programme and highlighted that gross
reserves have increased to $4.3 billion on the back of a Chinese loan injection but pointed out that this amount is still below a one-month import cover.

Pakistan has attracted only $690 million in foreign direct investments (FDI) during the July-February FY23 period compared to $1.2 billion over the corresponding period last year.

On the other hand, the outflows on account of debt repayments were $2.4 billion higher than the inflows during the July-January period and going forward, these flows are expected to improve owing to assurances from friendly nations.

He mentioned that a successful completion of the ongoing 9th EFF review of the IMF is critical and things may start improving after that.

In respect of foreign remittances the governor SBP mentioned that compared to $31 billion last year, foreign remittances will fall from $28 billion to $29 billion in this fiscal year meaning a reduction of about $3 billion though the expert opinion is that the reduction will be far higher when compared with this year’s projected increase of $33 billion.

The governor explained that the difference in the official exchange rate and that in the grey
markets also caused a reduction in remittances but he added that the SBP has suggested the federal government to revise remittance related fiscal incentives, including for Saudi Arabia, to reverse the downward trend.

He stated that the exports may also remain in the range of $28 billion to $29 billion that is almost $9 billion to $10 billion less than the official target set at the time of the budget.

Exports have fallen by 7.4% during the July-January period and the decline in exports was broad-based except for some high-value-added textile items. He mentioned that inflation will remain elevated during the next three months but hoped that the average inflation rate during the current fiscal year would remain around 26%.

He also pointed out that he is not sure about further rise in interest rate but knowledgeable sources mentioned that that another 2% increase in the interest rate was coming next month on the IMF’s demand. Last week, the central bank increased the interest rate by 3% to 20% in a move to keep inflation expectations anchored amid rising inflationary pressures and increasing political and economic uncertainty.

Despite high interest rate inflation increased to 31.5% in February 2023 as inflationary pressures remained elevated across all sub-components that are food, core and energy.

Things are difficult though as is known by the IMF is getting confirmation from multilateral and bilateral creditors on all avenues of external financing for moving forward. Some other minor issues remain unresolved so far but the Pakistani authorities seem confident about the
signing of the agreement this week.

Reportedly, both sides are reviewing nine tables of Memorandum of Economic and Financial Policies (MEFP) and full implementation of each and every point will pave the way for the signing of SLA with Pakistan.

It is mentioned in this respect that the government passed a mini-budget in order to fetch an additional Rs.170billion by the end of the current financial year. However, the government has not yet notified the imposition of an enhanced GST rate of 25 per cent on luxury imported items as well as on locally-manufactured vehicles. It is reported that the IMF has sought details from the Ministry of Finance in this regard and it was told that the government had moved a summary to the federal cabinet for getting approval after which the Statutory
Regulatory Order (SRO) would be issued.

Yet another complication is staring the Pakistani policy makers as the IMF has raised objections to Pakistan’s plan to directly borrow from local commercial banks in relaxation of competition rules, resisting the move that might cause distortion in the debt market.

The objections were raised during a meeting held between Pakistani authorities and an IMF team when it was known that the coalition government wanted to borrow at least one-tenth of its financing needs through direct negotiations with commercial banks.

It had planned to initially raise Rs.400 billion from conventional and Islamic banks, a move that the IMF principally opposed due to its adverse implications for the debt market.

It was reported that the government tried to convince the IMF that the direct borrowing option would be used for emergency purposes only aimed at avoiding any blackmailing from commercial banks. However, the IMF did not agree to direct lending as it wanted to avoid any further distortion in the debt market.

It is already struggling to end distortions created in the currency exchange market by the government and central bank.