July 01, 2023 (MLN): After the signing of the Staff Level Agreement (SLA) to complete the combined 7th and 8th reviews of the Pakistan Extended Fund Facility (EFF) on July 13, 2022, it took almost a year amid dilly dally from the Pakistani side to unlock remaining SDR 2.25 billion (almost $3 billion).
The development took place at the eleventh hour, as the ongoing program was set to expire on June 30, 2023.
The last-minute rescue via Stand-By Arrangement (SBA) may be celebrated by the incumbents and depicted as the success of their economic policies; however, it may provide just a short-term respite and prevent the country from an imminent default.
Pakistan faces external liabilities worth above $20 billion which are to be honored in FY2024. The reserves are at their nadir, with the central bank’s treasury left with just $3.5 billion. In the absence of an IMF bailout, the financing channels from friendly countries and multilateral lenders were bound to dry out, creating havoc for the already fragile economy of the country.
Finance Minister Ishaq Dar tried his utmost to resist the pressure of submissiveness to the fund’s demands. He even portrayed that the country will be able to survive economically without IMF and came up with plan B. However, with the introduction of mini-budget in February followed by a major overhaul of the financial bill within couple of weeks of its announcement in the lower house, the government had to give up. The ‘last weekend surrender’ at the nick of time paved the way for unlocking of the tranche.
The main bone of contention between the fund and IMF remained the securing of commitments from friendly countries worth $6 billion to fund external account deficit and restoration of proper functioning of forex market where the gap between interbank and open market rates widened amid artificial control of exchange rate. The fund also stressed the reforms in the energy sector to prevent slippages which led to mounting circular debt. Objections were also raised on negligible efforts to broaden the tax base. There also seemed to be a trust deficit between both the entities amid finance czar browbeating the IMF multiple times accompanied by the steps in the past which derailed the IMF program.
The eleventh-hour SBA will also open other avenues of funding from bilateral and multilateral lenders along with approaching the private market for raising money. The fragile reserves position will get much needed support in the wake of recent development.
The external account balance and currency may remain under pressure as one of the significant conditions of the fund was to lift the import restrictions. The outflow of capital on account of import payments and profit repatriation may keep both items under pressure.
Inflation may remain elevated owing to rising electricity and gas. The rise in petroleum development levy by Rs.10 may also lead to a surge in energy prices. CPI may witness a declining yet elevated trend owing to the high base effect of last year. The last-minute default aversion may also provide a breathing space for the ruling coalition to regain their lost political support in the wake of upcoming general elections.
The Eurobonds of the country depict the excitement of investors following the latest news. The country’s Eurobonds worth $0.5 billion and $1 billion have appreciated by 13 cents and 16 cents, respectively. The stock market investors also remained excited pre-Eid following the ‘last weekend surrender’.
The country may have averted a default but will this bailout be a panacea for the ailing economy? The answer may be a big NO.
Though it may resolve the country’s short-term liquidity issues, serious reforms are needed in various sectors along with across-the-board consensus on economic policies. Else, the country will always crave for such bailouts to ensure its economic survival!
Copyright Mettis Link News
Posted on: 2023-07-01T16:19:53+05:00
