December 17, 2018 (MLN): The recent policy rate hike announced by SBP to 10% and CPI trend has brought discussions regarding Pakistan’s near entry into International Monetary Fund (IMF) program in the limelight.
The November 30 increase in the policy rate preceded by the rupee’s fall to a new low of 139.06 to a dollar signaled to the financial markets that uncertainty about going to the IMF has end now. These events indicate that political positioning and posturing aside, Pakistan is now serious in seeking a fresh IMF loan.
After taking loans from other friendly allies, why is it indispensable for the government to seek for IMF bail-out?
In order to fulfil immediate economic needs, a country must have some stand by arrangements, for Pakistan IMF- bailout is one of those.
Since, Saudi Arabia has transferred another $1 billion to Pakistan as the second tranche of total bailout package worth $3 billion.
However, the aid from Saudi Arabia may provide breathing space to the government for dealing with economic challenges but would not be enough to avoid the IMF facility. It will provide only much needed short-term support to our Balance of Payment (BOP) crisis, it cannot substitute a comprehensive bailout package. But it is believed that improved foreign exchange reserves would strengthen Pakistan’s negotiating position in talks with the Fund.
Additionally, the aid from china is undisclosed but it is expected that China will not offer a relief package equivalent to the Saudi’s commitments. However, given that they are a significant creditor, occasional rescheduling of payments owed and several projects under industrial cooperation framework, which are part of CPEC can help us meet our net foreign exchange reserves targets.
Moreover, the impact of USD 6bln bail-out package from Saudi Arabia, of which USD 3bln of deferred oil payments that are available to the country from January 2019 onwards on the SBP’s depleting Forex reserves is uncertain. Whereas, if we assume the full impact of USD 3 bln, our reserves are still in red zone. This “Defer Oil Payments Relief’ by Saudi Arabia is actually a business deal to sell the oil on easy conditions and extended period of payment, in other words a help in goods rather than cash.
Although Pakistan appears unwilling to accept several of IMF’s terms and conditions, given that recently Finance Minister Asad Umar said that Pakistan is in no hurry to strike a deal with the Fund to cope with its Balance of Payments (BOP) crisis, funding from “friendly countries” would help shore up the economy over the remainder of the current financial year.
It is nothing more than denial of reality, given the fact that these funding will only provide short-term relief, they are not sufficient to improve foreign exchange reserves enough to tackle BOP crisis. It is now apparently clear that the vulnerability of foreign reserves will likely dominate IMF conditions.
Moreover, Fitch rating agency recently stated in its report that in the absence of an IMF programme, Pakistan’s liquid foreign exchange reserves would continue to fall and inflation is expected to rise.
Following this, the uncertainty regarding the currency will remain in the market because in order to meet IMF demand, Pakistan must achieve 3 months of import cover and increase in their net foreign reserves. Therefore, to meet this target, further devaluation in the rupee is expected until the imports are sufficiently curtailed.
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