Saudi largesse plugs Pakistan's sudden reserve hole

Islamabad to seek additional loan from IMF

ISLAMABAD:

As Saudi Arabia extended a $3 billion new loan to fill a sudden hole in reserves, the government has decided to request the International Monetary Fund to increase the size of the current $7 billion bailout package to offset the impact of the Middle East war on the economy.

Official sources told The Express Tribune that the deliberations have taken place in the Prime Minister's Office and the Ministry of Finance to enhance the size of the $7 billion Extended Fund Facility, which is ending in September next year. With the approval of the $1 billion fourth tranche next month, Pakistan has so far availed $4 billion.

The development came on the heels of Saudi Arabia's decision to extend another financial bailout package to Pakistan to help the nation meet its external financing needs in line with the IMF requirements.

Finance Minister Muhammad Aurangzeb said on Wednesday that Saudi Arabia has committed $3 billion in additional deposits, with disbursement expected in the coming week. He further stated that the existing $5 billion Saudi deposit would no longer remain subject to the earlier annual rollover arrangement and would instead be extended for a longer period.

With the fresh loan, Saudi Arabia has become the single largest country that has placed a total $8 billion cash deposits with the central bank. A $3.5 billion hole has surfaced in the gross official foreign exchange reserves after the United Arab Emirates did not roll over its debt despite making commitments with the IMF.

Pakistan is expecting a total $5 billion new financial assistance from friendly countries to retain the reserves at their current levels.

Aurangzeb said that the government remained committed to maintain reserves in line with its obligations under the IMF, including the objective of achieving around $18 billion in reserves, equivalent to approximately 3.3 months of import cover, by the end of the fiscal year.

The Express Tribune had first reported in January that the UAE did not give one year rollover to Pakistan but at that time the finance minister hoped that the friendly country would soon roll over the debt for one year.

 

Additional IMF loan

The government sources told The Express Tribune that it has been decided to seek an additional loan from the IMF under the existing package and there were high chances that the IMF would honour Pakistan's request.

The IMF's managing director has said that her organization was expecting $50 billion financing requests from the member countries to deal with the Middle East war shocks.

The sources said that the IMF executive directors were also urging the Fund management to either augment the existing programmes or provide new financing windows. They added that seeking a new financing facility from the IMF may not be possible but the existing programme can be augmented with additional loans.

Pakistan can avail up to 600% of its quota in the IMF and, so far, it has exhausted 350% of the total quota. The sources said that there was a $2 billion to $2.5 billion window available, which Pakistan wanted to utilise to handle the effects of the Middle East war.

The sources said that Pakistan was eligible to avail the additional IMF financing to deal with the war shocks. They said that there were very high chances that the IMF would accept Pakistan's request for increasing the loan size.

Extending loan to Pakistan to deal with the war impact would not be a favour but supporting the country to pass through the crisis, said the sources.

At 600% quota Pakistan can avail a total $16 billion loan and it has exhausted $9.5 billion. This makes a strong case for the augmentation under the existing Extended Fund Facility programme.

The finance ministry officials said that Aurangzeb raised the issue of additional financing with Dan Katz, First Deputy Managing Director IMF.

A finance ministry handout, issued after the meeting between the IMF deputy managing director and the finance minister in Washington, stated that Aurangzeb engaged Dan Katz "on programme continuity and external shock impact".

The finance ministry further stated that Aurangzeb briefed the first Deputy Managing Director on the immediate impact of the ongoing conflict on Pakistan's economy, particularly in relation to energy procurement and logistics.

Aurangzeb "apprised the IMF leadership of Pakistan's ongoing assessment of the second and third-order effects of the crisis, including implications for inflation, growth, exports, and remittances", according to the announcement.

The government's position about the impact of war has changed, as it had earlier told the IMF that its external sector would remain stable despite the war.

The sources said that there were two options of either front-loading the additional loan by the IMF or giving it tranches.

However, the higher exposure to the IMF debt would also increase the interest rates and surcharges, said the sources. They said that Pakistan will have to pay higher interest rates to the IMF to avail the additional facility.

Aurangzeb also took up the issue of higher surcharges on additional loans with the IMF during his ongoing visit. Muhammad Aurangzeb called for an early and substantive review of IMF surcharges, saying this carried significant implications for developing economies.

The sources said that the high surcharges can be avoided by convincing the IMF to front-load the additional loan amount instead of staggering it in tranches.

The IMF mission is also arriving in Pakistan by the middle of next month to finalize the new budget, including deliberations on taxation matters.