Since September, the gross reserves position has worsened and by October 11 the reserves came down to slightly over $4.1 billion, according to the SBP. DESIGN: TALHA AHMED KHAN
As an International Monetary Fund (IMF) mission is arriving in Islamabad next week to assess the country’s performance against agreed targets before releasing the second loan tranché of $550 million, Pakistan has missed the target by about $800 million on the indicator of building foreign currency reserves.
Talking to The Express Tribune on Tuesday, renowned economist and former finance minister Dr Hafiz Pasha said balance of payments position was worsening compared to what had been projected by the IMF for the first quarter of the current fiscal year.
Against the requirement of increasing gross foreign currency reserves held by the State Bank of Pakistan to $5.64 billion by the end of September, the reserves actually stood at $4.824 billion, showing a gap of $816 million, he said.
IMF documents also confirm that the Fund would like to see gross reserves at $5.64 billion by September-end.
Since September, the gross reserves position has worsened and by October 11 the reserves came down to slightly over $4.1 billion, according to the SBP.
“The worrisome aspect is that hemorrhaging is going on despite the country being in the IMF programme,” said Pasha.
He predicted that November would be a terrible month as the country was going to return $700 million to the IMF in five tranches and there would be no new release of loan from the lender to Pakistan.
“I suspect the reserves will be at $3.3 billion by the end of November, much less than the one-month import bill,” he added, saying the big question was whether the country was entering a financial crisis despite an IMF programme, like Greece.
Pasha said net foreign exchange reserves held by the central bank had become negative at $3 billion. The IMF requirement is to keep net reserves (excluding forward contract liabilities and IMF liabilities) at $2.499 billion, according to the IMF documents.
An IMF review mission is arriving on October 28 for holding first review meetings, according to sources in the Ministry of Finance. The mission will review progress on targets, both quantitative and performance criteria, before sending a request to its executive board to release the second tranche of $550 million in December, they say.
Overall, Pakistan has met almost all performance criteria, qualifying for the next loan tranche, they add. Building the reserves is a quantitative target, having no adverse impact on the next tranche.
However, the SBP will have to give a plausible explanation to the IMF. If the IMF did not agree with the argument, it has the authority to upgrade the condition to a performance criterion for the next review meeting.
The adverse implication is that the SBP may have to increase market intervention in an attempt to mop up dollars for building the reserves, which is likely to put the rupee under further pressure.
In the first quarter of the current fiscal year, the rupee shed 7% of its value against the US dollar and experts forecast that it would depreciate at least 7% more by June 2014, taking the parity to Rs113 to a dollar.
Pasha suggested that the government should seek upfront release of IMF tranches to avert balance of payments crisis. Unlike the previous programme when the IMF gave $3.1 billion upfront, this time the lender has divided the $6.7 billion programme into 12 equal tranches.
Pasha differed with the IMF projection that the current account deficit would widen to only 0.6% of gross domestic product in the current fiscal year. His assessment was that the deficit would widen to 1.7% as reducing CNG consumption would increase the oil import bill by $500 million.
He said unlike the balance of payments position, public finances were largely on track and the government achieved the first-quarter budget deficit target. He, however, was the view that the country could miss the full-year target of 5.8% of GDP and the gap could widen to 7%.
He claimed that the government had placed Rs158 billion worth of deficit outside the books that would have to be taken into account at the end of the year.
Published in The Express Tribune, October 23rd, 2013.
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@The Failed Rebel: India in 1991 , Thailand and South Korea in 1997 got IMF loans, implemented structural reforms and their economies turned around. @Abussamad did have a valid point I.e. Pakistan lacks forex to import necessary goods like oil, fertilizers and even wheat. Absence of forex will significantly increase your inflation and shortages.
Please show me countries that do not have interest based debt and who actually created wealth. And no - the Gulf countries are not good examples because they did not create wealth. Examples of wealth creation are countries like Singapore, who created wealth without any mineral resources.
@abdussamad: I am an engineer. I can and I have. Secondly, on whose side are you? The Pakistanis or these corrupt spineless rulers? If you sought to negate my comment and my stance, then please explain yourself. So that if I am wrong, I would know better. But don't talk about the economic gibberish of forex etc. It is all useless, and is a serious deviation from the real problem: Interest-based debt. I provided a viable alternate plan. Infact the best plan anyone can ever come up with. Let me tell you real hard facts which are hard to believe: Our consistent reports coming from the engineers actually working on site indicate that the oil in Baluchistan is 100% usable. The same company forwards a falsified report that this is not possible. If you recall there is purified oil found in DI Khan. Talk about usability you can pour that literally into your bike and it will start running. The aforementioned issues make it evident that someone is strongly trying to cover up the potential in KP and Baluchistan. I don't see any other alternatives. Loans? Interest? Do the math like a very responsible person and you will know that ALL interest based loans eventually lead to deprivation or poverty. Don't talk like a media-fueled whistleblower. Know the real hard facts. If you are on Pakistan's side, you will find none other than The Failed Rebel by your side. P. S. I like *nix too.
@piddler: In theory. But not in this case. We got an agreement but the first tranche was too low to build up our reserves. They've front loaded the program with conditions rather than money! This is what you get when you keep breaking your promises time and time again.
@The Failed Rebel: Why don't you grab a spade and head on out to KP?
@Salman Ahmed: This is not about the budget deficit. This about the fast depleting forex reserves. We need dollars not rupees. Rupees the government can produce out of thin air in unlimited quantities. But dollars? Pakistan can't print dollars.
I am at lost of word. Borrowing $550 Million from IMF but pledging $450 million to Afghanistan By PM NS in NY. where that money will come from. or it is just talk no action.
isnt we begged on our knees to US and got a big 1.6 billion dollars??? We beggars are now rich.. i think we can tell that to IMF...
Well that's what you get when you remove Musharraf and bring in the likes of Zardari & Nawaz who previously brought the reserves to the verge of $300 M. Enjoy now!
Total and utter incompetence and corruption of PMLN.
They had other options available - as in their manifesto (probably copied from the PTI manifesto).
If they had decided to tax ALL income, the budget deficit would have been eliminated and even some some loans begun to be repaid. Interest rates would have dropped and unemployment reduced.
They chose to tax the poor consumer and the salaried class leaving the rich to enjoy life even more. This will bring great social unrest.. . just look at Greece and Spain.
Bravo to the people with no broad economic vision and especially the IMF supporters. I sure hope that IMF decides to break the deal altogether. Please do more reading on interest-based debt system. Please. Any interest-based debt will ALWAYS result in poverty and will only give an illusion of temporary relief. Pakistan's solution lies in the excavation of minerals in KP and Baluchistan. Oh wait, those are sensitive areas, completely war ridden? Oh, someone else must be paying the radical sanctions there so that Pakistan cannot mine there and become independent. Oh wait, Pakistan shouldn't be allowed to be a sovereign nuclear power. Shame on fail economists and the "experienced" team members. Drenching my people deep into the pit of deficit. Absolutely no vision in the long-run for the country's development.
@Ashkenazi: Usurious terms? How did you figure? No one else was willing to lend forex at any interest. IMF is a lender of last resort. Anyway, all that it is trying to ensure is that you have enough forex to be able to return their loan without requiring yet another loan as has been the case This can only happen if the country puts in the necessary structural adjustments.
It is fine for Hafiz Pasha to say that money should have been front loaded. But the reaso n IMF has adopted this path is far lure of Pakistan o follow through with agreed structural adjustments after receiving the money last time around. Now each tranche will be released after reviewing that prior commitments have been met.
@Max: No conundrum there. If you do not increase reserves and they stay at this low level, thee and supply situate on will ensure a rapid depreciation anyway - IMF or no IMF.
Ya Allah Khair, IMF team arriving means more taxes and more price hikes !
Hope IMF also looks at the unpaid sales tax,Income Tax refunds and unpaid custom duty draw back claims.
The Nation has to take charge of it's own destiny and start paying proper taxes from all sources of income
So the IMF will give loan on usurious terms or selling our sovereignty to meet that reserve requirements.
IMF loans are the proverbial 5 million pound note. You never have to see it or cash it but it can fix all including forex markets.
So the ex-Finance Minister who is partly responsible for bringing the economy to this state is the only expert that you could find to comment on this?
What a conundrum, increase reserves by sucking up dollars from market and the Rupee wil devaluate to around Rs 130 per dollar, or don't increase reserves and lose the $7 billion loan. Hmm.