PAKISTAN secured a $1 billion commercial loan from a Chinese bank a day after the announcement of the federal budget 2018-19 on April 27 which is repayable in three years. This improved its total foreign exchange reserves to $17.7bn, jacking up official reserves held by the State Bank of Pakistan by 5.5 per cent to $11.5bn.
Based on past experience, many analysts believe another programme from the International Monetary Fund was inevitable and perhaps around the corner given the political transition involving three governments changing hands in less than four months.
The government has already revised its estimates for external resources to almost $12bn from original budget estimates of around $8bn, more than doubling commercial loans to almost $7.2bn from around $3bn for the current fiscal year.
Therefore, a lot would depend on the political situation at home and abroad, particularly the evolving diplomatic relationship with the United States and Europe.
In the past, besides domestic challenges, the relationship with the US had played a critical role in shaping up the pace of foreign flows into Pakistan, including repeated IMF bailouts. This time, the US has already shown its diplomatic muscle at the Financial Action Task Force (FATF) that would once again be a key determinant in June this year.
The finance minister expected the measures introduced by his party to be sufficient to avoid the IMF indicating that the government was already doing things that the Fund desired it to do in case the need arose
As things stand now, current foreign exchange reserve can cover less than three months of imports that have grown at an average rate of 15.6pc in the first nine months to $38.4bn despite recent slow down to 6pc in March. Exports have posted a 13pc growth in nine months over last year to $15bn, despite a healthy 24.4pc growth in March.
That means that while the growth in the trade deficit is slowing down, it is nevertheless still increasing significantly every month. At the end of the current fiscal year, in less than two months from now, exports are estimated to reach $25bn compared to full-year estimated imports of about $54.5bn, leaving a trade deficit close to $29.5bn.
After accounting for healthy remittances estimated at $20bn, the government expects the current account deficit at the end of the current year at about $16bn or about 5pc of GDP. Reserves have been depleting at an average rate of $475-$500 million a month.
And adding forward coverage into the equation, reserves are significantly lower than two months of imports. That’s where the IMF’s estimates of negative net international reserves (NIR) at $725m make sense at the end of 2017-18, with foreign debt in excess of $70bn.
Positive exceptions this time around are domestic economic fundamentals. A high economic growth trajectory along with an ideal low inflationary environment, despite strong consumption and rising public sector credit and growth investments, to name a few.
But despite these strengths, the inherent uncertainty remains a key challenge, suggesting another painful adjustment under the IMF programme just round the corner. That’s where even Finance Minister Miftah Ismail leaves an element of uncertainty in his feel-good narrative.
“I am leaving the goods in order by May and if the next government (caretaker) keeps things normal by June, we will not be required to go to the IMF,” he said recently while emphasising that the Fund’s support would be required for financial assistance if the government fails to curtail the trade deficit.
He expected the measures introduced by his party to be sufficient to avoid the IMF indicating that the government was already doing things that the Fund desired it to do — twin depreciations within a few months.
Many still believe the steps already being taken on the advice of the IMF was an indication to a spade work.
The government on the other hand is believed to have requested China and Saudi Arabia for a $2bn-$3bn standby support to have breathing space until next elected government takes over. Efforts are in progress to materialise at least a billion dollars before the close of the year to ensure that reserves are enough for 8-9 weeks of imports and the economy sails through July 2018.
For next year, the government expects exports to go up to $27.3bn against estimated imports of $56.5bn, leaving a trade deficit of $29.2bn and current account deficit estimated at a conservative $12.5bn (3.8pc of GDP) for next fiscal year.
The full year current account deficit for the outgoing fiscal year is estimated at $13.7bn or 4.4pc of GDP. Therefore, the government concedes that high fiscal and current account deficit in
2017-18 may pose a challenge on the external front going forward.
Keeping our fingers crossed at this stage for next year as the government expects obtaining over $10bn (Rs1.118 trillion) including over $3bn-$3.5bn commercial loans, $2.5bn sovereign bonds besides $1.6bn from the Asian Development Bank and around a billion dollar each from China and the Islamic Development Bank.
Published in Dawn, The Business and Finance Weekly, May 7th, 2018