Last update: Tue, 17 Jan 2017 03pm
Home » BR Research »

Strategy: Secure CSF inflow, bridge finance

When officials from Pakistan and United States of America convene for the US-Pak strategic dialogue later this week, the economic imperatives will likely anchor the terms of engagement.

Despite improvement in macroeconomic variables including single-digit inflation and a slight pickup in economic growth, Pakistan’s economy remains uneasily poised on the verge of a Balance of Payments crisis.

After the most recent repayment to the IMF amounting to 394 million dollars, SBP foreign exchange reserves are down to the vicinity of 8.8 billion dollars. The country must pay back another 1.5 billion dollars to the Fund before the end of this fiscal. The brunt of these repayments will be faced in February and May.

Those outflows could take forex reserves down further to about 7.3 billion dollars, while further pressures on the current account may deplete the same tally to about six billion dollars by June. That would mean that the country’s forex reserves would only suffice for 40 days worth of imports.

There is immense pressure on the local currency and it is slowly but surely depreciating, having dropped by 1.5 percent since the start of this year. Market pundits predict a further slide of about 10 percent (IMF 13 percent) this year. If these expectations prove to be rational, the rupee-dollar exchange rate could cross the century mark by February.

The government had factored into the budget, inflows worth 820 million dollars from the auction of 3G licenses and similar pending flows from the privatisation of PTCL. However these inflows appear dicey at best at the moment.

The only hope of any foreign flows to pump in is from pending payments under the Coalition Support Fund. The Pakistani delegation’s agenda will likely center on the early release of 800 million dollars from the CSF.

The US line will focus on Pakistan’s further help in the ongoing war in Afghanistan – the ‘do more’ mantra. With the time of US exit from Afghanistan coming close, the push on our army to tackle the Nato war is going to be loud and clear.

Our foreign policy has nothing much on the table to safeguard our long-term interests which are colliding with the short and medium-term goals of USA. Meanwhile Pakistan’s Finance Ministry is cash strapped and in search for funds.

Interestingly, right after the strategic dialogues, consultation with the IMF will initiate. History suggests that when these two events take place together tough economic decisions are on the palate.

In 2008, when then-finance minister Shaukat Tarin negotiated with the IMF, steep depreciation in rupee and tighter monetary policy followed. Similarly, in 2009, in the absence of any materialization of FoDP commitments, Tarin and his team were able to structure a bridge financing scheme.

A similar suit may be followed by Hafeez Sheikh and his team when they meet the Fund next week.