The most burning issue the economy faces today is whether Pakistan is going back to the IMF and when if it is. The question can be addressed by an attempt to forecast the SBP foreign exchange reserves with an assumption that the country would be compelled to enter into the fund programme, when the import cover falls below 2 months.
Currently, the import cover is around three months on the estimated imports for FY18. The SBP’s liquid reserves have to fall under $9.6 billion to come below the psychological level of 2 months of imports. For simplicity, assuming oil price remain high, the critical reserves level should be at least $10 billion for not going back to the IMF.
The PMLN would not want a bailout package from the IMF in the last leg of its tenure. Assuming the government leaves after announcing budget by May end; will have a buffer of $4 billion at current reserves level to survive without knocking those familiar doors again.
The SBP plans to keep reserves at $14 billion by FY18 end. The central bank expects current account deficit at $12 billion; and for that gross financing requirement for FY18 came at $12.9 billion including $6 billion debt repayment.
BR Research expects current account to be around $15 billion for the full year and that takes the gross financing requirement to $15.9 billion. Let’s run through numbers to get to the gross financing requirement. Out of $15 billion CAD, $3 billion might come from FDI (5MFY18:$1.1bn), leaving $12 billion to be plugged. The reserves are expected to fall by $2.1 billion from $16.1 billion to stay at SBP target of $14 billion. This reduces the gap by $2.1 billion to leave the net financing gap at $9.9 billion. With around $6 billion of debt repayment, the gross financing gap would be at $15.9 billion.
With half the year gone and approximately $3 billion debt repayment done, nearly $2 billion reserves are evaporated. With an anticipated CAD for 1HFY18 at $7.5 billion and FDI of $1.4 billion, the half year net financing stood at $4.1 billion, while the gross financing is roughly $7.1 billion.
The net foreign debt is probably increased by $4.1 billion while total foreign borrowing in 1HFY18 is calculated at $7.1 billion. Out of this, $2.5 billion is raised from international capital market, around $1.5 billion came from China and the rest is from commercial and other short term borrowings and multilateral agencies.
For reserves to remain at current levels of $14 billion by June end, another $8.8 billion are required to be raised in 2HFY18. The SBP is confident that it has resources to fill the gap; however, SBP’s calculation is based on $12 billion of CAD in FY18. Some of it may come from China, multilaterals and short term borrowings and if the amount falls short, the government might go back to the capital market.
The number seems high for the government to raise; but it has a cushion of $4 billion from its target to avoid the IMF, However, it may not like the caretakers to knock the IMF doors, as this may elude PMLN chances of winning elections. The government may let the currency slip again and start tightening monetary policy to keep current account deficit in check.
But is going to the Fund inevitable in FY19? Seeing the flight of oil prices which is taking imports to scary levels (read: Sky high imports; published on January 16, 2018), in the absence of all weather friend’s help, the IMF may well be the only ugly choice.
Had Chinese financing not been there; Pakistan could have already gone to the IMF. In FY17, the gross financing requirement was around $14 billion, out of which $5 billion reportedly came from China. Without that money, reserves would have already been below two months of imports.
Having done the number crunching, the question of entering into the IMF programme is more political. There is no hard and fast rule of two months of import cover. There were times in late 90s, when the reserves had gone down to just two weeks of import, before Pakistan entered the IMF programme.
Secondly and more importantly, CPEC might be jeopardized under a strict IMF programme. Would the Chinese let want this happen to one of their key routes in the OBOR initiative is the million dollar question.
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