Orbit of external influence: IMF or no IMF?

Updated December 31, 2018

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THE PTI-led government has bought more time in which to conduct the difficult negotiations with the International Monetary Fund (IMF) by securing cumulative $6 billion deposits which will help shore up foreign reserves in the shot-term.

According to a media report, which has not been officially denied, Saudi Arabia’s one-year $3bn deposit is ‘not to be used for debt servicing or any other foreign exchange obligations’.

Take a look: Dealing with the Saudis

The terms and conditions of UAE’s $3bn have not been announced but earlier reports said that the Emirate’s assistance will not be an alternative to an IMF loan.

It is unlikely that UAE and Saudi Arabia, close allies, will be pursuing different forex deposit policies. Incidentally, the United States does not want the IMF credit facility to enable Pakistan to repay Chinese loans.

Imran Khan and the IMF: Pakistan's bailout dilemma

Another $3bn Saudi deferred payment facility for oil purchases is extendable annually, for three years. As Pakistan’s imports are well over 50 per cent of its oil needs from UAE, —the rest comes from Saudi Arabia— it is looking forward to a similar support from the Emirate.

However, a stubborn external sector ‘crisis’ has left no option for the PTI-government — both on account of domestic and external reasons — but to access multilateral assistance.

Addressing the G20 Summit in Argentina, IMF Managing Director Christine Lagarde expressed deep concern over the total value of global debt that has rocketed by 60pc since the international financial crisis of 2007-08. Pakistan’s debt profile is no different from the global debt trend.

In a joint press conference in Islamabad on Dec 19, the Country Director Asian Development Bank (ADB) Xiaohong Yang and the ADB’s visiting Strategy, Policy and Review Department’s Director General Tomoyuki Kimura announced that the bank will give policy loans after getting a letter of comfort from the IMF on the economy’s assessment.

Explore: The IMF’s corrective measures will be harsh. Here’s how the government can get straight to policymaking

Pakistan’s debt profile is fast deteriorating, though an official in Islamabad says they may be able to muddle through this year without an IMF bailout with Chinese commercial loans and flotation of bonds and by boosting home remittances.

The Emirate’s assistance will not be an alternative to an IMF loan

Fitch Ratings has forecast that the debt-to-GDP ratio at 72.5pc recorded last fiscal year will rise further to 75.6pc of GDP this fiscal year ‘as a result of additional rupee depreciation.’

The current sovereign debt servicing over the next three years will amount to $7.9bn per annum. Fitch has downgraded Pakistan’s long-term credit rating from B to B negative.

Pakistan’s Fitch Ratings downgrade: What it means and what it doesn’t

Assessing debt sustainability is ‘one of the priority issues’ on the agenda in the ongoing talks between Islamabad and IMF staff, the Fund’s Communications Department’s Garry Rice revealed at a press conference in Islamabad on Dec 15.

Unlike in the past, the Fund is stated to have shifted its focus to ‘primary balance’ instead of the overall budget deficit.

Also read: Pakistan will be going to the IMF for the 13th time. Will PTI’s Asad Umar fare better than past ministers?

Debt sustainability means much more than just balancing the books through patchwork. Raising the price of gas and electricity to reduce losses is not the same as making bleeding utility companies financially viable by increasing efficiency and productivity. Even the World Bank does not agree with such a policy for utility pricing as the underlying problems remain unresolved.

On the opportunity it opens, Pakistan’s entry into the IMF programme ‘would build confidence of all stakeholders’.

Pakistan’s ‘Memorandum of Economic and Financial Policies’ envisaging ‘macroeconomic stabilisation graduating into growth strategy over the next three years’ is under discussion.

The IMF is demanding that most of the policy actions, both fiscal and structural, must be front loaded in the first year while Pakistan wants them to be spread over three years of the programme, and in some cases to run into the fourth year.

Finance Minister Asad Umar told a parliamentary panel on Dec 19 that owing to the delay in finalisation of the agreement with the IMF, a mini-budget will be announced in January.

A number of measures (or preconditions) have already been taken by the government and the State Bank to qualify for the IMF credit facility. An official source is quoted by Dawn’s correspondent in Islamabad as saying that the IMF wants ‘the adjustment to come before the funds are disbursed.’

The Fund is seeking a cut in current account expenditure including debt servicing, defence and subsidies, says the official who has been part of the negotiation process.

While both sides denied that the exchange rate is being targeted, as speculated to a level of Rs145 or Rs150 to a dollar, they confirmed that under discussion is the IMF proposal on how the exchange rate may be determined to transit towards a market-based exchange rate regime.

By giving a different interpretation, the Arif Habib report sees challenges ahead such as the ‘IMF’s proposal for a free float ‘implying’ additional devaluation of 5-7pc and 100-150 basis points increase in policy interest rates. Authorities rule out a free float.

To reduce the huge trade imbalance and foreign debts, the government is banking on import substitution and export-oriented investment from China. It wants to ‘leverage Chinese experience, latest technology and efficient methods to supplement domestic manufacturing capabilities.’

As this point of time the move is at the Memorandum of Understanding stage (signed in Beijing on Dec 20) and will take some time to materialise.

The PTI government will be put to a critical test in 2019 in setting the policy direction while the IMF stability programme is likely to influence the course of the economy for better or for worse during PTI’s term in office.

jawaidbokhari2016@gmail.com

Published in Dawn, The Business and Finance Weekly, December 31st, 2018