The support of the International Monetary Fund last week for the State Bank of Pakistan’s ‘new measures’ to control inflation by tightening the monetary policy did not surprise any one.

The government had already ‘reaffirmed’ its commitment to ‘align monetary and exchange rate policies’ to rebuild rapidly declining foreign exchange reserves whilemaintaining price stability during the first quarterly review of the $6.6bn Extended Fund Facility loan days before the SBP raised its key policy rate by 50bps to 10pc. It is the second raise since September when the IMF approved the new programme.

“I would say that we are supportive of the SBP’s recent monetary policy decisions. The trend in monetary tightening will help contain inflation and will also aid in the SBP’s drive to rebuild foreign exchange reserves,” said IMF Director Communications Jerry Rice in Washington.

But financial analysts here said reserves must hit a new low before the bank’s tight monetary policy stance can help it rebuild the stocks.

Reserves held by the SBP plunged to a five-year low of $3.6bn – barely enough to pay the bill for another three-and-a-half weeks of imports – on debt payments and growing trade deficit.

Trade deficit in the first four months of the year to October has risen to $6bn from $5.2bn a year earlier as exports grew by 0.6pc compared with imports that surged by 6pc.

With more debt payments scheduled for this week, reserves are feared to hit a new bottom.

Many financial analysts rule out the possibility of a rise in reserves over next several weeks.

“I don’t see any official or private capital flows coming to Pakistan for some time. I strongly fear for exchange rate stability in next few weeks,” said an economist for a bank on condition of anonymity.

Even the IMF is not scheduled to release the second tranche of $550m from its EFF loan until late next month. Private foreign direct investment rose negligibly to $284mn from $252mn a year ago.

Federal finance ministry officials, however, do not agree. “The reserves situation will stabilise shortly,” a senior finance ministry official told Dawn from Islamabad by telephone.

The official, who didn’t give his name because he is not authorised to speak on this subject, claimed that the government was in the process of raising a foreign currency loan from a consortium of the banks, float euro bonds and receive an oil credit facility from the Islamic Development Bank.

Nonetheless, he refused to ‘speculate’ on total amount or answer as to when these flows would materialise.

“I don’t want to get involved in any guessing game. At the moment I can only tell you that we are working on it and you will see the results soon,” he said.

The government is expecting realisation of the outstanding PTCL privatisation proceeds of $800mn, auction of 3G telecom licences and external financing from the World Bank, the Asian Development Bank, IDB as well as from bilateral donors like the UK and the US before end of current fiscal year to perk up reserves going forward.

In a statement after the conclusion of first programme review, the IMF mission chief Jeffery Franks said “the programme remains broadly on track”.

He said the government met all quantitative performance criteria by end of first quarter of the present fiscal with the exception of the reserves target, which underperformed due to lower than expected external flows including foreign investment and other official assistance coupled with interventions by the SBP to ease pressure on the rupee.

He also said the balance of payments challenges would persist for some time to come and called for ‘firm action’ to rebuild reserves by aligning monetary and exchange rate policies.

The IMF statement also indicated an understanding with Pakistani authorities on a (new?) set of economic policies for the future to be detailed in an ‘updated’ Letter of Intent.

This has spawned speculations that the IMF will change the programme goalposts for the government when it signs a new updated LoI.

When contacted, advisor to the finance ministry Rana Assad Amin ruled out speculations about changes in the programme targets and benchmarks.

“The EFF is quite different from the Standby Arrangement facility. It is not one programme. It comprises 12 small packages spread over 36 months and requires signing of a new LoI after every quarterly review.

“But it doesn’t mean that the goalposts will be changed every time. There will be no significant change, if any, in the programme already agreed with the IMF,” he insisted.

An anonymous official said new LoI may soften the net international reserves (NIR) condition by altering the method of measuring it.

It was the only programme target that Islamabad could not achieve during the first quarter because of delayed release of coalition support funds of $323m by the US.

“Unless the IMF agrees to change the method of measuring NIR and other bilateral and multilateral lenders start disbursing money, Islamabad is going to miss the reserves target for the entire year,” he said.

“Pakistan can solve its deteriorating balance of payments position and avert a freefall of the rupee in the near term only by accelerating sale of 3G telecom licences and recovering PTCL privatisation proceeds. In the long-term, it will have to convince IMF and other lenders to release the promised assistance before it is too late to control the damage.”