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.
Like Business on Facebook, follow @TribuneBiz on Twitter to stay informed and join in the conversation.
Comments are moderated and generally will be posted if they are on-topic and not abusive.
For more information, please see our Comments FAQ