‘Pakistan set to secure second IMF tranche’

Despite missed targets, research house projects positive outlook

KARACHI:

Pakistan is on track to secure the International Monetary Fund’s (IMF) first economic review under its $3 billion loan programme in November, paving the way for the release of the second tranche of $700 million, despite some missed targets and challenges in implementing promised reforms.

A recent report from Topline Research titled ‘Pakistan IMF Loan Review: Funding Requirement, Primary Deficit, Gas Pricing & Monetary Policy’ highlights that while Pakistan has faced obstacles in meeting certain benchmarks, there is a high probability that it will receive the next IMF tranche. The IMF’s Executive Board may grant a waiver if it believes the programme remains viable, and missed structural benchmarks and indicative targets are assessed in the context of overall programme performance.

The State Bank of Pakistan (SBP) governor, in his post monetary policy briefing on September 14, 2023, confirmed that all quantitative performance targets required by the IMF programme related to the SBP, including Net Domestic Assets (NDAs), swaps and net international reserves have been met. Similarly, the finance ministry has expressed its commitment to maintaining fiscal discipline and achieving primary balance targets.

Pakistan secured a nine-month Stand-By Arrangement (SBA) from the IMF worth $3 billion in June 2023, marking a significant achievement after the failure to revive the previous $6 billion programme on the same day. The SBA exceeded expectations in terms of both duration and size.

Read: Emerging economies face pressures as IMF, World Bank meet

Under the $3 billion SBA, Pakistan received $1.2 billion in July 2023 and expects an additional $700 million upon the successful completion of the first review. The government is also exploring commercial loans worth $5 billion and another $0.7 billion from various sources, aiming for total projected foreign inflows of $26 billion for FY24.

Furthermore, Saudi Arabia and the UAE deposited a combined $3 billion into SBP’s account to support the IMF loan programme in June, boosting the nation’s foreign exchange reserves to approximately two months of import cover at $8 billion by mid-July.

However, the reserves have experienced a decline due to the absence of additional foreign currency inflows from multilateral and bilateral financial institutions, which had promised $9 billion in flood relief during a Geneva meeting in January 2023.

The policies under the new IMF programme (SBA) are designed to stabilise Pakistan’s economy and strengthen its financial buffers, said Topline. Key policy elements include an appropriate FY24 budget to support necessary fiscal adjustments, a shift to a market-determined exchange rate, and a well-functioning foreign exchange market to address balance of payments pressures and eliminate foreign exchange shortages.

Other priorities include a suitably tight monetary policy to combat inflation and anchor expectations, as well as ongoing efforts to enhance the energy sector’s viability, improve governance of state-owned entities, and strengthen the banking sector while building resilience to climate-related challenges.

For decades, Pakistan has relied on the IMF to address its external account funding requirements, making the successful implementation of the IMF programme critical to the country’s economic stability.

According to the SBP governor’s statement in September, Pakistan’s total external financing requirement for FY24 is $24.6 billion, with $2.8 billion already paid. Commitments for rollovers worth $8 billion have been secured, with an additional expected rollover of $3 billion. The net payable amount stands at $8 billion.

Topline Research suggests that if the government can effectively manage the current account deficit to approximately $4 billion for FY24, compared to $6.5 billion, it can meet its financing requirements, especially considering the challenges associated with commercial borrowing.

Published in The Express Tribune, October 8^th, 2023.

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