New programme won be on easy terms

Pakistans finance minister is in Washington to terminate the current IMF programme. Perhaps reading between the lines will reveal the intent to initiate a new programme, somewhere down the line.
The government, being optimistic, believes it would be able to manage its payments to the IMF due in 2012 without any significant external help. The idea is based on anticipated high export earnings and foreign exchange reserves of around $18 billion and expectations of the ever rising remittances to be at the same level next year.
However, there are many ifs and buts. The premise of continuity of stable foreign exchange reserves and health of current account balance is on the unprecedented growth in home remittances, but critics are sceptical of the status quo.
Remittances from the developed world and the Middle East to developing countries especially in the South Asian region had been on the rise, globally. However, this trend has tapered off in India and Bangladesh in the last two years.
The average annual growth in remittances from 2000 to 2008 in Pakistan, India and Bangladesh stood at 32, 19 and 21 percent respectively. From 2008 to 2010, the average annual growth fell to 17, 3 and 10 percent, respectively. The sudden decline in the growth rates exposes the vulnerability of remittances.
This anomaly can be attributed to a number of factors including channelising undocumented remittances to the legal channel and converting black money to white as there are no questions being asked on the source of funds brought to the country. Also for now, investors are capitalising on the vast interest-rate differential between Pakistan and developed economies such as the US, where rates are near zero.
In the absence of detailed scrutiny, it is hard to pin point which factor is attributing how much and its sustainability. In a nutshell, it is not wise to make decisions on dubious remittances growth.
Moreover, the exports may not match the previous years growth as key export commodity prices are receding globally. Hence, the current account may not remain in green as it was, last year.
Dissecting the import cover, half of these reserves are owed to the IMF, much like an elephants teeth to show but not to eat. They are just parked with the SBP for balance of payment support and gaining confidence of foreign lenders and investors.
Of the remaining reserves, $3.5 billion is held by commercial banks. Thus, with just $5.5 billion - two months of import cover - its hard to absorb any external shock. Mind you, some of the remaining reserves have been parked by friends like Saudi Arabia and China in the aftermath of 2008 BoP crisis.
So the reserves can fall like a house of cards in a crisis-like situation. In that case, exporters may delay their payments and importers may do it early in the anticipation of a fall in rupee against dollar.
A rapid depreciation of the local currency could also deter remittances from abroad. The chances of such an event are increasing as rupee is hitting the lowest levels in the history of the country. Some economists anticipate rupee to dollar exchange rate to hit the century mark anytime soon.
History suggests that whenever Pakistan approaches the IMF for a fresh programme, the Fund asks for an adjustment in currency i.e. realignment of nominal exchange rate to real effective exchange rate and it requires some serious adjustment. The writing, it seems, is pretty much on the wall.
Pakistan may end up negotiating a fresh programme with more stringent conditions as the continuity of the current programme is in jeopardy from the Funds side, as most of its conditions have not been met. Keep your fingers crossed!