Another nod from the Fund

IMF has applauded the government’s efforts in meeting both quantitative and qualitative targets. Many of the structural benchmarks have been met while a few are lagging behind owing to legal challenges and depressed commodity prices. Is this something to be proud of? Not at all!
Economic growth is not likely to pick up in FY16 and in the medium to long term; there are challenges and serious risks to repaying foreign debt including loans obtained from the IMF.
The fund has revised down its GDP growth estimate by 20 bps to 4.5 percent for FY16 - against the government’s target of 5.5 percent.
What is the efficacy of a recovery that is not able to boost industries or generate employment for the bulging youth population?
Then there are severe concerns over the sustainability of foreign exchange reserves and the picture can get bleak once the cycle of repayments starts or oil prices rise again. It would rather be a nightmare if both happen at the same time. Some economists fear that is inevitable, post 2018.
IMF is cognizant of the fact and it has mentioned in its country report that there is no worry for the country’s capacity to repay its external liabilities for the next twelve months. Reserves are building to cover three months of imports, the country has access to international financing to reduce risk, and multilateral and bilateral flows will keep on pumping in along with IMF’s quarterly tranches.
The threat looms once the honeymoon period is over. “The materialization of risks to the economic outlook could erode Pakistan’s capacity to repay to the Fund, particularly in a context where Fund exposure is expected to increase further.” lamented the fund in the country report published last week.
A close look at the process of reserves building and analyzing factors behind taming current account deficit expose the fragility of the recovery. The one-off inflows like privatization of blue chip companies will exhaust. The ability to access international financial markets is more of a threat than an opportunity. It’s not at all prudent to excessively replace domestic debt with foreign debt.
The argument presented by Finance Minister that money raised through Euro Bonds and Sukkuk is cheaper than domestic sovereign papers is flawed. The first and foremost factor is that there is no foreign exchange risk in servicing domestic debt as the government can print rupees in bad days but it surely cannot print dollars - lessons to be learned from the Greek fiasco. And even if we take Dar and company’s justification on the face value, the foreign commercial debt is not cheaper. The foreign bond at the rate of 7-8 percent without adjusting for currency depreciation is higher than current secondary market bonds’ yields at home. And who would bet on the Rupee-Dollar parity to remain sticky for years to come?
The most workable and sustainable solution is to control the external liabilities as percentage of exports earnings. Unfortunately, the external public and publicly guaranteed debt to export in percentage is well over 100 percent and rising further.
According to the IMF’s report, it was 145 percent in 2012-13 and reached 166 percent after the first year of PMLN government. It is expected to be around 160 percent for rest of its tenure.
Is it the prudent economic management by Dar? Exports are falling and external debt is piling up. Nonetheless, right now the current account deficit is tame as the depressed commodity prices have substantially eased the oil import bill while non-oil imports are increasing. There is no buffer to any external shock. The domestic industry is finding it hard to grow and this is adversely affecting the country’s export competiveness while the gap is being filled by imports. How long can remittances fill the gap?
In FY15, the CAD is below one percent of GDP and the Fund forecasts it to be at 0.4 percent of GDP in FY16. This is a conservative estimate as, given the oil prices remain at current levels, current account may be marginally surplus in FY16. The fund expects SBP liquid reserves to reach $17 billion by June 2016 from existing $13 billion – BR research estimates are even better.
The Fund expects inflation to be 4.7 percent in FY16 while the government’s target is six percent. BR Research believes that the Fund’s estimates are too optimistic as inflation may rebound in the second half of the fiscal year and it seems government’s target is more realistic.
The macros are improving but what is missing is growth and once we are back on growth ladder exports will grow naturally.
But that doesn’t seem to happen in FY16, the recent budget announced by Dar was also lacking substance for growth stimulating policies.