KARACHI: With projected external financing requirements of $31 billion in FY19, Pakistan is “very likely to seek an International Monetary Fund (IMF) programme”, says Johanna Chua, Citigroup’s Head of Emerging Markets Asia Economics & Strategy Bank in a report released on Monday. The report says an approach is likely by end September.

“The sheer size of Pakistan’s external financing gap and an experienced list of technocrats advising the government on economic issues will likely lead to the same conclusion” she says, going on to warn that “not going to the IMF is a far more economically and politically painful/riskier option than otherwise.”

The report says the IMF “and other major stakeholders” should be supportive, adding that the Fund appears to be “very ready to engage the government” and that the US “sees a stable Pakistan economy in its best interest geopolitically” while the Chinese and the Saudis “do not want to be the ‘lenders of last resort”, a reference to speculation that a bilateral bailout might be on the cards.

However, this time around, the support may come with strings attached, the report says. Pakistan has already had 21 fund agreements with the IMF; it is likely that the agency would push for a “more effective program than in the past.” This could include a range of reforms such as central bank independence, exchange rate flexibility and aggressive push to privatize public sector enterprises (PSEs) the report says.

Also, IMF could ask for guarantees to ascertain government’s commitment towards meeting the requirements of the program. Since Pakistan’s external debt service requirement alone will increase to $19bn in FY2020, according to IMF estimates, the program “would likely warrant more prior action and stringent requirement from Fund than before”.

Citi’s report also downplays any possible US resistance to the program arguing that the “US does not have veto power” in any of the decisions taken by the fund. US opposition over possible use of IMF funds by Pakistan to pay off Chinese debt is unlikely to get in the way of negotiations, the report says since “there is no significant external debt repayment to Chinese lenders in near term”.

China will not resist an IMF program, says the report. Also, since IMF does not evaluate individual projects, she says in the report that “China is unlikely to be opposed to greater disclosure of China-Pakistan Economic Corridor related program,” as important details can already be found on project website.

Concerns over the lack of urgency on the part of the government could potentially drag the negotiations, the report continues. The report challenges Imran Khan’s claims on “attracting overseas diasporas money and bringing back looted wealth” labelling the approach “unrealistic and inadequate”.

Stressing the need to deal with loss-making Public Sector Enterprises and circular debt, the report highlights “the accumulation of new payment arrears of power distribution companies (circular debt), which was brought to near zero levels in FY 2016 has been climbing since, reaching 596bn — 1.7 per cent of the GDP,” requires immediate attention. Criticising, the talks of setting up a sovereign wealth fund, the report termed viability of such project “unclear”.

In the unlikely event of Pakistan not opting for an IMF program, the government will more likely “lean on import controls” and suffer higher funding costs.

The report also takes into account the nascence of new government but expresses confidence on recent appointments including the Economic Advisory Council (EAC) on Friday.

Published in Dawn, September 4th, 2018