Karachi, December 06, 2022 (PPI-OT): IMF and Pakistan – Concerns seem more forward looking
The 9th Review under the extended arrangement of the ongoing Extended Fund Facility (EFF) has been slow and a cause of concern for market participants. We review Pakistan’s performance from the lens of recent IMF Staff Report.
As per the government and analyzing criteria for which data points are reported; barring 1Q primary surplus criterion, other reported data points are line with targets. Hence the disagreements are most likely structural or forward looking in nature (for e.g. upcoming potential fiscal slippages).
As significant future bi-lateral and multi-lateral inflows to Pakistan are subject to IMF’s satisfaction regarding the economy, we believe receiving IMF’s nod in today’s time is most crucial than ever amid 4-year low SBP reserves that just cover for 5 to 6 weeks of imports.
On the contrary, the government is confident on receiving ~US$3bn in the coming days that would improve SBP reserves. Any delay in the aforementioned probable receipts could induce volatility in the currency markets.
Pakistan’s review continues to loiter
The 9th review under the extended arrangement under the ongoing Extended Fund Facility (EFF) has been lingering since a month with mixed progress on it so far. Key issues lie in prospective revenue collection capacity and flood related expenditure, expected to reflect in the coming quarters, rather than the past criteria met. While news flows suggest IMF’s disappointment over unsatisfactory working on flood impact from the government, the government claims to have met all pending quarterly conditions relevant to the review.
Despite most targets being met
We quantify Pakistan’s performance from the lens of recent IMF Staff Report. As per the government and analyzing criteria for which data points are reported; barring 1Q primary surplus criterion, other reported data points are line with targets. We present select benchmarks and actual data reported against the same in the table below. In additions to the set criteria, SBP also took the Funds advice given under Staff Appraisal on monetary policy needing to be proactive and data-driven to reduce inflation towards target, resuming the tightening cycle last month, reflecting consistent efforts towards consolidation.
Weight of IMF’s nod most than ever
Significant future bi-lateral and multi-lateral inflows to Pakistan are subject to IMF’s satisfaction regarding Pakistan’s economy. We hence believe receiving IMF’s nod in today’s time is most crucial than ever amid lower prospects of smoothly funding the country’s external financing gap with almost 4-year low SBP FX reserves and an import cover of barely 5 to 6 weeks. With the Eurobond payment of a little over US$1bn and receipts of US$500mn from AIIB, we expect that in absence of any inflows, reported SBP’s FX reserves to drop to below US$7bn in coming days, lowest since Jan-2019.
Government confident on meeting external gap
On the contrary, the government is confident on receiving ~US$3bn in the coming days that would boost SBP reserves. Out of these, ~US$1.7bn are expected under project investments and from World Bank and ADB. Also, from the US$22bn debt obligations scheduled for FY23, the government claims to have successfully rolled over almost US$7bn (including US$3bn to Saudi Arabia), while is making efforts in shrinking this year’s current account deficit that was initially estimated at US$12bn for FY23.
With delay in export receipts and expanding gap between inter-bank and curb market PKR/US$ rates, we believe any delay in the aforementioned probable receipts would induce volatility in currency markets and pose a key risk to our base case estimates of 10% depreciation for the remainder of FY23.