ISLAMABAD: Asad Umar, the man tipped to lead Pakistan’s finance ministry, says no option including knocking on the doors of the International Monetary Fund (IMF) will be ruled out as the country tackles its way out of a severe economic crisis.

The Pakistan Tehreek-e-Insaf (PTI) leader is the frontrunner for the post of finance minister and would be leading the negotiations with the IMF if the government chooses to exercise the option.

Pakistan faces a mammoth task of arranging around $11 billion to fill its external financing gap in the ongoing fiscal year. The deficit is higher than Pakistan’s gross official foreign currency reserves that currently stand at $9 billion. Experts say even the IMF alone cannot fill the gap. Its 2013 bailout saw Pakistan get over $6 billion spread across three years.

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The requirement alone underscores the gravity of the challenge that the government-to-be would face in its first year in power. According to election results released till late Thursday night, PTI is in a clear position to form the government in the centre with support from its allied parties and independent candidates.

“The crisis is so severe and requires measures so urgent that no option can be ruled out,” said Umar while responding to a question of whether the IMF programme was an option on the table.

However, many believe it will not be that easy to seek an IMF package, as the lender could make certain politically unpopular actions, including privatisation of state-owned enterprises, a condition for the bailout. The mood in Washington will be another factor that could play a significant role, according to independent analysts. The financing gap is the difference between external requirements and available financing. External financing needs is sum of the projected current account deficit and external debt servicing.

The Ministry of Finance, the IMF and independent economists have assessed Pakistan’s gross external financing needs for 2018-19 to fall in the range of $23 billion to $28 billion. As usual, finance ministry’s estimates of roughly $23 billion financing needs are at the lower end. The IMF has assessed the needs to be at $27 billion and independent economists like Dr Hafiz Pasha have calculated the needs to be at $28 billion.

After accounting projected foreign direct investment, net expected loans from multilateral and bilateral sources, anticipated issuance of sovereign bonds and commercial borrowings, the gap remains at a minimum $11 billion, said sources in the finance ministry. They said there was a plan to issue $3 billion sovereign bonds and get about $2 billion in foreign commercial loans.

In the last fiscal year, the finance ministry had claimed that the financing gap would be $2 to $2.5 billion but it was proven wrong.

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Pakistan could book a current account deficit of $18 billion in FY19 again, while it would need $9.5 billion to $10 billion for external debt servicing, said Dr

Pasha. He added that in this fiscal year, Pakistan will repay roughly $500 million to the IMF and also return $1 billion sovereign bonds. “There will still be $10 billion to $11 billion as external financing gap after accounting for all the possible inflows,” said Dr Pasha. He urged to take immediate measures to avoid consuming foreign currency deposits.

The finance ministry still believes that the current account deficit would be close to $15 billion -which is nearly 17% less than the last fiscal year. It has projected external debt servicing at $8 billion. The ministry’s assessment of $15 billion deficit was based on the assumption that the regulatory and administrative measures would significantly contain the import bill. However, these measures have failed in the just ended fiscal year.

Mammoth size

However, the problem is the size of the financing gap, which could also affect the cost of borrowing.

Pakistan has a 2-billion special drawing rights (SDR) quota in the IMF, which is equal to roughly $2.8 billion. The IMF’s quota is broadly based on the size of the economy of its member country and its voting power. In 2013, the IMF had approved a $6.2-billion bailout package, which was equal to 425% of the allocated quota.

In 2008, the IMF had approved $11.3 billion bailout package for Pakistan, equal to 700% of the country’s quota.

At present, Pakistan owes $4.2 billion to the IMF, which means the country has already exhausted about 150% of its quota. This could further reduce the size of the IMF loan to Pakistan, said sources in the finance ministry.

“The new government should seek a front-loaded programme to gain breathing space early in its term,” said former secretary finance Dr Waqar Masood.

If the country manages to get an IMF programme, the Asian Development Bank and the World Bank can also restore suspended budgetary support to Pakistan. These two lenders require IMF’s letter of comfort before restoring budgetary support.

In recent months, Pakistan has thrice increased its key interest rate in addition to devaluing its currency by over 22% against the US dollar since December 2017. These two measures could address some of the concerns of the World Bank, sources in the finance ministry said.

Published in The Express Tribune, July 27th, 2018.

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