2013: IMF bailout loan inevitable, but timing uncertain

Current account deficits have never really been a headache for Pakistans economic managers as long as the financial account received sustained inflows. The 5MFY13 CAD stood at $365 million ($2.34 bn in 5MFY12), and the full-year deficit is expected to be a low, one percent of GDP. However, financing even such a contained deficit may prove difficult in the wake of meager financial inflows and large outflows.
During the year 2012, the situation arising from paltry FDI inflows and the gradual evaporation of foreign project loans and grants was greatly compounded by the retirement of principal on IMF loans taken out in the past under the Stand-by Arrangement and the Extended Credit Facility. In November 2008, Pakistan had negotiated a $7.6 billion SBA facility with the Fund, which was later raised to $11.3 billion.
However, owing to a mix of government inaction and failure to follow through with the reforms prescribed by the Fund; the SBA was prematurely suspended in April 2010, when Pakistan was yet to receive two remaining loan tranches. The SBA was finally terminated in September 2011. The Fund later started a Post-programme Monitoring review for Pakistan, a phase of which is currently underway in Islamabad.
Pakistan was regular in its repayments to the IMF during CY12, paying back over 2.3 billion dollars. But that took its toll in the absence of dollar inflows. The countrys liquid forex reserves were nearly $16.9 billion as on January 6, 2012, with SBP having $12.82 billion in its coffer. On December 28, 2012, the liquid reserves were down to $13.8 billion - the central bank holdings had to $9 billion.
This shows that while the total liquid reserve declined by 18.3 percent in CY12, the SBP reserve depletion was higher, almost 30 percent, which further reduced the import-cover during the year. The rupee slide continued throughout the year - the currency declined by over eight percent against the US dollar in the interbank market last year.
It is quite apparent that the forex reserve position and the rupee-dollar parity would further deteriorate if the financial inflows continue to remain hapless during the ongoing year. Latest IMF estimates show that Pakistan is scheduled to pay 2.369 billion SDRs in calendar year 2013, which comes to a whopping amount of $3.62 billion (SDR-USD equivalency as per IMFs January 9 valuations).
During 1HCY13, major repayments are due in February and March, followed by the month of May (see illustration for repayment schedule). The impact of heavy repayments during second half last year was eased only to an extent by the windfall CSF inflows during the period. Similar breathing space seems unlikely to come forth in 1HCY13.
This is going to build more pressure on external accounts, essentially shrinking the crisis timeline. Recourse to IMF is fast becoming a necessity to avoid a BOP situation. Yet a scheduled electoral transition, due in May this year, complicates the process of negotiating any BOP support and accompanying policy & reforms prescriptions with the Fund.
While the IMF seems open to have negotiations for a fresh facility with the incumbent (and later, the caretaker) government, it may, understandably, only sign on the dotted line with the next administration, so that a clear responsibility to initiate and enforce the reform measures is assigned. In that scenario, forex reserves and the rupee will be under an increasing amount of pressure for much of the first half this year.