ISLAMABAD: Pakistan has decided to engage with the International Monetary Fund (IMF) as an internal working suggests that benefits of getting a bailout programme outweigh the cost that Islamabad may have to pay, including some compromises on economic sovereignty.
After doing an in-house analysis, spanning over two weeks, Pakistani authorities have decided to invite an IMF staff-level team, said sources in the Ministry of Finance.
They said Finance Minister Asad Umar has contacted IMF’s Director for Middle East and Central Asia Jihad Azour.
The finance minister confirmed to The Express Tribune that the IMF staff-level team would visit Pakistan by the end of this month.
Engagement with the IMF should not be directly linked with any kind of formal programme talks, said Umar, while explaining the purpose of the IMF visit.
The finance minister said in case Pakistan plans on getting the IMF programme in future, the upcoming engagement would save time that is often required for exchange and validation of macroeconomic numbers.
The minister underscored that the IMF staff-level visit did not mean Pakistan has decided to avail a Fund programme.
Sources said the decision to invite the IMF staff-level team was aimed at keeping both options open.
“The communication is happening all the time on a routine basis at different levels,” said IMF Resident Representative to Islamabad Teresa Daban. She said such contacts are normal between the IMF and its member countries.
According to the sources, the prime minister’s next week visit to Saudi Arabia and follow-up visits by the Saudi monarchy to Islamabad will be a determining factor in taking a decision on whether to avail an IMF programme.
They said that the Chinese were also helping Pakistan for protecting the China-Pakistan Economic Corridor (CPEC) deals from scrutiny by external elements.
The decision to request IMF to send a staff-level mission was rooted in an in-depth assessment of Pakistan’s gross external financing needs for fiscal year 2018-19 and benefits and cost of availing an IMF programme, the sources said.
The joint assessment was made by the State Bank of Pakistan (SBP) and the finance ministry. They said this assessment was presented to Prime Minister Imran Khan last week and after that the finance ministry decided to invite the IMF team.
The fresh assessment of the external debt repayments showed that Pakistan needed $11.7 billion to service its external debt in current fiscal year 2018-19.
Pakistan’s gross external financing requirements have been assessed at an alarming level of $31 billion by the finance ministry. This is based on the assumption that the current account deficit will touch $18.5 billion.
The administrative and regulatory measures that will be taken may lower the current account deficit by about $4 billion to $14 billion, the sources said.
Against $31-billion financing requirements, the available financing is only $20 billion, which is inclusive of $13.2 billion projected borrowings and rollover of $2.8 billion short-term debt, they said, adding this still leaves the government with a financing gap of $11.1 billion.
Benefits without IMF
According to the sources, the PM was informed that Pakistan could retain its economic sovereignty and ensure secrecy of the Chinese financing deals under the CPEC by avoiding the IMF programme. They said that the government can also fulfill its commitments of reforms as per its own aspirations.
The premier was informed that at this political juncture it will be difficult to sell the IMF programme to the people, they said and added the new government can also avoid the typical IMF prescriptions, which are often in direct conflict with the government’s development agenda.
However, the cost of not availing the IMF programme is also significant, the sources said. The country will have to pay higher pricing on its international borrowings and the credibility of the reforms will be low. Pakistan can avoid surge in the short-term debt by availing long-term IMF lending, they said.
An IMF programme could immediately avert the balance of payments crisis. This will also open cheap financing lines from the World Bank and the Asian Development Bank (ADB), the sources said, adding, the programme will increase the country’s credibility in the eyes of international creditors.
However, in both cases, the stabilisation measures require a further devaluation of 9% in the value of rupee against the US dollar, they said.
“This means in the next nine months the rupee could see its value going down to Rs136 to a dollar.”
The SBP’s key policy rate may surge by 2% to 9.5% to handle the external sector problems. In this scenario, the annual economic growth rate will slow down to 4.7% and the inflation will inch up to 6.4%.
The government’s internal assessment showed that the current level of foreign exchange reserve of $9.9 billion was sufficient for only 1.8 months of import cover. These reserves are inclusive of $6.6 billion of forward swaps.
In October 2016, Pakistan had $18.9 billion reserves that were enough to provide import cover for four and a half months. But those reserves had been built by contracting expensive foreign loans.
Published in The Express Tribune, September 11th, 2018.