By: Muzzammil Aslam
Markets will not be at ease with IMF or without IMF program. Same goes with Asad Umer, with IMF his political implication will be multiplied and without his financial management will be complicated.
Market excitement will be short-lived too. Post IMF program, as multilateral institution demands serious actionable policies including tax hike, cut in PSDP, tight monetary and exchange rate regime, reforms in power and energy sector and amendment in 18th constitutional amendment.
Does Asad Umer have the luxury to by-pass IMF?
Well it’s not impossible. Asad can avoid the program with the support of allies & tough macro economic program. Later is the key to win the support from friendly countries.
So far, the political will displayed by the PTI Government is laudable. Within space of 120 days, the government has jacked up the interest rates, devalued the currency, passed the supplementary budget, announced concessions for exporters, cut the current & development expenditures.
On policy side, Separating FBR policy making from FBR, SBP independence, crack down on money laundering, removing tax anomalies, crackdown on under invoicing & smuggling are the key to address the structural issues.
Undoubtedly, the growth will be moderated and implicate consumption for private sector, driven by lower incomes. On the flip side, it will help to contain current account deficit. The deficit is expected to reduce to US$12bn from US$18bn from FY18.
Already the half of current year deficit is financed through reserves and the remaining half will be adjusted from US$6bn Saudi Arabia Pacakge.
What factors can lead Asad Umer to avoid IMF program
1- Reverse in CAD in 2019 & 2020. As per Muzzammil’s Desk estimate the CAD deficit will reduce to US$6bn in FY20.
2- Undisclosed support from China. Unconfirmed sources claimed that US$2bn soft loans will be disbursed from China in December.
3- trade concessions from China and administrative measures will help to generate extra $2-3bn exports
4- US-China trade war resulted into huge commodity price deflation and hence help Pakistan to curtail import bill to US$45bn
5- Investments from UAE, Saudi, China and others will help to accumulate reserves
If all the above factors will give enough comfort of 3 months import cover then Asad Umer should gracefully avoid IMF program.
If Pakistan manages to avoid IMF program while continue to do reforms to address structural issues then we might see windfall of private investments.
So far market has not priced in the above scenario and if above synopsis holds true and then one should expect a relief rally at PSX.
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