IMFs additional $3.2 billion facility for bridge financing against the $5.7 billion FoDP pledges augurs well for short term exchange rate outlook and fiscal slippages. However, in the absence of concrete policy reforms and non-materialisation of FoDP commitments, medium to long term outlook is bleak.
The approved fiscal support of $1.4 billion implies printing of money worth Rs116 billion by the central bank that will increase money supply by 2.25 percent. In addition, the IMF says that Pakistan can print $431 million, approved as a part of its conventional facility in excess of the $769 million tranche, to meet its fiscal gap. Although, the lender has left this usage to Pakistans prerogative, given the countrys fiscal condition, it will print the money, thereby increasing the money supply by an additional 0.7 percent.
On budgetary support, IMFs tone seems leaning toward the improvement social safety network, with the likely deployment of this money to support IDPs, poor households and other social spending. Finance Ministers Shaukat Tarins plan to resolve circular debt (which might require an injection of Rs200 billion) within a month is surely not going to be supported by the lender. Passing on the subsidy burden to end consumers in tandem with setting up of new power plants (both IPPs and dual convertible RPPs), hence, is the only viable option to address acute power shortage.
In the meanwhile, lets keep our fingers crossed for the central banks upcoming interest rate decision. "Monetary policy should remain vigilant about preventing a resurgence of inflation. The relaxation of the fiscal policy stance, electricity tariff increases, and the rebound in oil prices will add to inflationary pressures that monetary policy needs to combat" - this part of IMFs press release deciphers the delay of monetary policy review and the cautious stance that we will likely hear when SBP unveils its policy on Saturday.
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Pakistan has reached 70 percent of its IMF quota (6.3% of GDP)
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USD (mn) as USD (mn)
IMF Purpose SDR (mn) of now in Nov 08 Comment
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Dollar depreciated
To curb BoP crises & against SDR by
increase SBPs Fx 7.1% from Nov
Standby Facility Reserves 5,169 8,136 7,600 08 to Aug09
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$1,400 mn
(Rs 116bn) of it
Dual purpose both will be used for
New facility BoP and Fiscal Support 2,067 3,236 fiscal support
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Total Facility 7,236 1,137
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This tranche SDR
275 million ($ 431
million) higher
than initially
planned addition
can be deployed
Tranche Released 767 1,200 1,121 for fiscal
support
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