IMF review: agreement on the horizon?

The wait for IMF’s pending review has now been over-extended. In Feb 2020, the staff level agreement was reached for the second review, but some steps were required before getting board approval. Then, Covid came and in April, Pakistan received $1.4 billion in RFI. The validity of that letter of comfort was for six months, and now the pending pre-Covid second review needs to be concluded post-haste.

Talks with IMF are ongoing. The vibes from Islamabad are that the earliest mission is targeted in December. The idea is to reach an agreement before the mission starts consultations virtually. If the mission completes in December, the board approval can take place in January. But for that to happen, measures on fiscal and energy side are needed to be taken. On fiscal, there could be some removals of exemptions in corporate income tax; fin-min is also searching avenues for non-tax revenues.

In energy, nothing short of some increase in electricity base tariffs would work – negotiations are on the delta and on presentation of workable plan to reduce circular debt. NEPRA autonomy is being demanded as well. This party is tricky, and the PM might not take a decision without a solid plan (under development) by Ministry of Power. Moreover, autonomy requires legislation, on which the program timeline is dizzy.

Having said that, there is clear indication that IMF’s board level comfort is on continuation of the program. This is evident by recent approval of ADB’s policy loan of $300 million. This is for budgetary support and it requires IMF’s letter of comfort. It has been provided by the IMF’s board to ADB. This should ease markets tension about the program’s fate.

This has allowed some breathing space. The government should now target reaching the markets for Euro bonds issue. The reserves building should continue. Benefits of current account surplus in days of low travel should be taken to full. SBP’s reserves increased by $484 million to $13.4 billion last week – it is the highest level seen under the incumbents. With ADB money and better balance of payment, the number may cross $14 billion before the end of calendar year.

But there are some risks. Covid second wave could hurt exports. Export orders are booked for the next few months; but there are incidences where buyers are deferring shipments. Then, Covid second wave can delay the timeline of Euro bond and Sukuk issues. SBP must consider attracting domestically held foreign currency (cash) into the system. The Roshan Digital accounts should change gears now. SBP’s target should be to reach $20 billion by June 2021. Fingers crossed.