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KARACHI: With progress made in talks between the government and the International Monetary Fund (IMF), Pakistan’s external sector is likely to witness gradual stabilisation, according to an expert.

Finance Minister Miftah Ismail during his talks in the US said his government is prioritising management of the external sector and fiscal deficit.

“We believe that PSX [Pakistan Stock Exchange] investors would be keenly watching the updates on these issues in the run-up to elections,” said Fayaz Hussain, an analyst at Sherman Securities.

With the period for which the country has import cover declining below two months, and reserves falling to $10.9 billion as of April 16 (23-month low), the brunt of the changes is being borne by the exchange rate.

The management of reserves and ensuring adequate import cover are the key challenges for the government amid commodity super-cycle, Hussain said.

International fuel and food prices are expected to remain elevated as global shocks continue without any respite. The finalisation of an agreement with the IMF could avert a balance of payments crisis. As per reports, the government has managed to secure additional funding of $2.0 billion under the programme.

Hussain said that the breakthrough in talks would help stop the bleeding of foreign exchange reserves, unlock inflows from other bilateral sources like the World Bank, and provide much-needed support to exchange rate.

To note, at the start of PML-N’s previous term, the import cover fell to a low of one month only. However, the PML-N government managed to enhance the cover by getting a bailout from the IMF and securing funding from other bilateral sources. However, this time around the challenges are more daunting due to relatively high forward liabilities.

The IMF’s agreement is conditioned upon the government’s willingness to manage subsidies on fuel prices. Finance Minister Ismail has committed to tighten the fiscal belt by removing subsidies in a phased manner.

As per the government’s estimates, fuel and power subsidies (under the PM package) will put additional fiscal burden of around Rs 370 billion on the government by end of FY22. Of this, 60-70 percent is on account of fuel prices whereas the remainder is due to reduction in electricity tariffs.

In order to keep fuel prices unchanged, the government has also taken a revenue hit (i.e. petroleum levy collections and sales tax from fuel products). “We expect FY22 budget deficit to clock in at Rs 5.0 trillion (8 percent of the GDP) provided the fuel prices are reduced in a phased manner,” Hussain said. This would be the highest deficit in terms of percentage of GDP since FY19 when it clocked in at 8.9 percent. Last time, when budget deficit hit the peak of 8.9 percent, the interest rates were around 13 percent.

“This time around, with rising outlook for inflation, we expect the State Bank of Pakistan to keep rates high to peak at 13 percent,” he added.

Copyright Business Recorder, 2022

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