Pakistan would need another IMF programme post elections: report

Pakistan would require another bailout programme with the International Monetary Fund (IMF) to address its long-term structural issues and external financing needs, a prominent brokerage house said in a report published on Thursday.

Arif Habib Limited (AHL), in its report titled ‘Pakistan Economy: IMF is here for the long haul’, said with repayment obligations of $75 billion during FY24-26, the external account remains in a tight spot.

“The government estimates disbursements of $103 billion during the next three years to finance the repayments and the Current Account Deficit using a combination of bilateral, private debt, and multilateral flows,” it said. “Unlocking these flows, however, requires Pakistan to stay engaged with the IMF for the long term.

“We expect Pakistan to complete the current programme with another programme post General Elections (2H2023).”

The brokerage house said the IMF’s Extended Fund Facility (EFF) program, which has lately fallen off track amid delays in the completion of the 9th review, would be back on track in the first quarter of 2023.

“Survival without IMF is not an option given the scale of the external financing needs, where a majority of the funding is linked to an IMF endorsement,” it said. “We expect a host of revenue and fiscal consolidation measures including i) imposition of GST on petroleum products and removal of GST exemptions, ii) gas tariff hike, ii) rationalisation of electricity tariffs etc. to get the programme back on track and to pave the way for release of the next tranche of approximately $1.2 billion in February 2023.”

Currency market

On the continuous volatility in the currency market, the brokerage house said PKR/USD has been artificially managed through administrative measures including limits on opening letters of credit, ban on certain imports, and curbs on dollar repatriation to keep outflows in check.

“This has, however, created a vibrant grey market with 10-12% gap between official and unofficial rates hurting official remittances.

“We don’t see these measures as sustainable and expect the State Bank of Pakistan (SBP) to gradually loosen administrative measures as the IMF 9th review concludes and other flows materialise. Hence, we expect PKR/USD official exchange rate to converge towards the unofficial rate and decline to 250/263 by June/December 2023, respectively,” it said.

Pakistan’s GDP growth projected to remain below 3–4% in FY23, says SBP

AHL also expects headline inflation to remain elevated in the remainder of FY23 (Dec’22-Jun’23), at an average of 23.8% mainly due to administrative measures.

“The SBP shall maintain a tight monetary policy and raise rates by another 1% in 1QCY23 with gradual easing in FY24 as inflationary pressures start to subside. Fiscal tightening shall continue.

“In the backdrop of a tight monetary and fiscal policy and the impact of floods, we estimate FY23E GDP growth to fall to 1.78%, in comparison to 5.97% in FY22.”