Pakistan’s gross financing needs in the current fiscal year would be more than fully met under the ongoing International Monetary Fund (IMF) programme while an extra cushion of $4 billion would be arranged, the State Bank of Pakistan (SBP) and the Ministry of Finance have said.
A joint statement issued on Sunday noted that the country’s financing needs stemmed from a $10bn current account deficit as well as external debt repayments of around $24bn.
“In order to bolster Pakistan’s foreign exchange reserves position, it is important for Pakistan to be slightly overfinanced relative to these needs,” it said. Consequently, besides the $1.2bn tranche expected to be released by the IMF in the coming weeks, funding commitments amounting to $4bn were being arranged through a number of different channels, including friendly countries.
The statement said Pakistan’s problems were temporary and were being forcefully addressed. Highlighting these problems, the SBP and finance ministry noted that the country’s foreign reserves had fallen since February as outflows surpassed inflows while the exchange rate had come under pressure.
“The paucity of inflows has happened in large part due to the delay in completing the next review of the IMF programme, which has lingered since February due to policy slippages. Meanwhile, on the outflows side, debt servicing on foreign borrowing has continued as repayments on these debts have been coming due over this period.”
On the other hand, the exchange rate had come under significant pressure, especially since mid-June, due to general USD tightening, rising current account deficit, declining reserves and worsening sentiment due to the delay in the IMF agreement and domestic politics, the statement noted.
It pointed out that the staff-level agreement with the IMF had been reached last month while the ruling coalition had also announced that it would complete its tenure.
Detailing the measures taken to contain the current account deficit, the SBP and finance ministry said the policy rate was raised by 800 basis points, the energy subsidy package was reversed, and the FY23 budget targets a consolidation of nearly 2.5pc of GDP, centered on tax increases while protecting the most vulnerable.
“This will help cool domestic demand, including for fuel and electricity.”
Besides this, temporary measures were also taken, including requiring prior approval before importing automobiles, phones and machinery, they said, adding that the restriction would be eased as the current account deficit shrunk.
“These measures are working: the import bill fell significantly in July, as energy imports have declined and non-energy imports continue to moderate,” the statement said.
A “considerable” slowdown was witnessed in the opening of letters of credit (LCs) for both oil and non-oil commodities, according to the statement.
Separately, it noted that a stock of diesel and furnace oil sufficient for five and eight weeks, respectively, was now available in the country, compared to the range of two to four weeks in the past.
“This implies a lower need for petroleum imports going forward,” it stated, adding that hydro would have a larger share in electricity generation in view of the recent rains.
“As a result of these trends, the import bill is likely to shrink going forward and should begin to manifest itself more forcefully in lower FX payments over the next 1-2 months.”
Rupee expected to appreciate
The SBP and finance ministry noted that around half of the rupee’s depreciation since Dec 2021 was linked to the global rise in the dollar’s value while the other half was related to domestic factors, including the widening current account deficit.
“The remaining depreciation has been overdone and driven by sentiment. The rupee has overshot due to concerns about domestic politics and the IMF programme. This uncertainty is being resolved, such that the sentiment-driven part of the rupee depreciation will also unwind over the coming period.”
The statement noted the central bank’s role in this regard, which it said had stepped in to sell dollars when the market became disorderly and took measures to counter speculation by closely monitoring and inspecting banks and exchange companies.
It refuted rumours that the government had agreed to a specific exchange rate with the IMF. “ The exchange rate is flexible and market-determined, and will remain so, but any disorderly movements are being countered,“ the SBP and finance ministry asserted.
The rupee was “fully expected to appreciate” in line with a reduced current account deficit and improved sentiment, according to the statement. It noted that the rupee had also strengthened in 2019 after the IMF programme started, reversing its earlier slide.
“Clearly, the rupee can overshoot temporarily as it has done recently. However, it moves both ways over time. We expect this pattern to reassert itself in the coming period.
“As a result, the rupee should strengthen in line with improved fundamentals in the form of a smaller current account deficit as well as stronger sentiment,” it stated.