The much-awaited staff report of the IMF (International Monetary Fund) on the seventh and eighth reviews was released on the 1st of September 2022. It contains projections of key macroeconomic magnitudes for 2022-23 and also for subsequent years up to 2026-27.
The most important projections relate to the external balance of payments (BoP) position of Pakistan. Given the extremely low level of foreign exchange reserves, Pakistan has been considered as prone to vulnerability in honoring its external payment obligations.
Therefore, the projections of the balance of payments for 2022-23 are of vital importance in indicating the extent to which under the umbrella of an IMF programme up to June 2023 Pakistan’s external vulnerability will be eliminated.
The first problem with the IMF numbers on the balance of payments in Table 3A of the staff report is that the numbers for 2021-22 do not tally with the actual magnitudes for the year reported by the SBP. These numbers were released by SBP on the 23rd of August. Ideally, the IMF staff should have had access to these numbers for 2021-22 prior to the finalization of the report.
The differences between the IMF projected magnitudes and the actuals are significant in some cases. The actual net balance of payments is fortunately better than the IMF estimated magnitude by as much as $1.2 billion.
This is due to the larger actual financial account surplus and smaller errors and omissions. Therefore, the IMF projections for 2022-23 should preferably be seen in relation to the actual magnitudes in 2021-22.
The first major feature of the BoP projections for 2022-23 by the IMF is a containment in the size of the current account deficit by $8 billion from the level in 2021-22 of $17.3 billion to $9.3 billion in 2022-23. This implies a big reduction of almost 47 percent in the size of the deficit.
How does the IMF expect this large containment of the current account deficit to be achieved? First, exports of goods are expected to increase by $3.2 billion, with a growth rate approaching 13 percent. Second, imports are projected to decline by $3.3 billion, implying a fall of close to 5 percent.
The remaining adjustment of $1.5 billion is to come from smaller deficits in services and primary income, with the net secondary income showing some deterioration due to a fall in workers’ remittances.
The likelihood of IMF projections being realized needs to be examined. The projections have been made without allowing for the likely negative impact of the floods. Therefore, the analysis has to be undertaken in two steps. First, without building in the impact of the floods and second modifying the projections in light of the floods.
The anticipated increase of 13 percent in exports in 2022-23 borders on optimism in the presence of a deepening global recession. Already in July 2022, exports have stopped growing. The IMF projection of the big containment in the size of the trade deficit is based on depreciation in the value of the rupee with respect to the US$ of over 22 percent in 2022-23.
Turning to the financial account of the balance of payments the good news is that the IMF anticipates an increase of 22 percent in the net inflows into this account, equivalent to a rise of $2.3 billion. The big jump is anticipated in portfolio investment of almost $2.8 billion primarily in the form of flotation of Euro/Sukuk bonds.
Overall, disbursements by multilaterals and bilateral combined are expected to increase substantially by $5 billion in the presence of the IMF programme. However, the net inflow is expected to be higher by only $1 billion due to a big increase in amortization payments of over $4 billion.
The bottom line is a dramatic transformation in the net balance of payments position from negative $7.5 billion in 2021-22 to a positive $6.4 billion in 2022-23. This will contribute to a big jump in the foreign exchange reserves from $9.8 billion at the end of 2021-22 to $16.2 billion by end-June 2023, equivalent to an import cover of 2.3 months.
The success in floating almost $3 billion of Euro/Sukuk bonds will hinge, of course, on the discount on these bonds coming down sharply. This in turn will depend on improvement in Pakistan’s credit rating, which was brought down from ‘stable’ to ‘negative’ by the three major credit agencies.
The big increase in disbursements from multilateral agencies requires a corresponding increase in the absorption capacity. This relates to the availability of counterpart funds for projects and expansion in project implementation capacity. Also, programme aid will increase only if the reforms required are implemented properly and on time.
The projected balance of payments for 2022-23 by the IMF implies a healthy increase in foreign exchange reserves by $6.4 billion to $16.2 billion. This will certainly contribute to restoration of market confidence and international perceptions of Pakistan.
There is need to build into the IMF balance of payments the likely impact of the devastating floods. Presumably, there will be a process of renegotiation with the IMF to reflect in the projections of the deterioration in the economic situation.
The first negative impact will be on exports, especially of textiles. The over 30 percent fall in cotton output will necessitate much larger imports. Food imports, especially of wheat, will also need to be raised on a priority basis. However, the GDP growth rate is likely to be only marginally positive. This will imply lower demand for imports.
The international inflows linked to the state of the economy will be smaller. This includes both foreign direct and portfolio investment. Hopefully, there will be larger inflows of emergency assistance.
Overall, the balance of payments projections will need to be changed substantially. If reserves do not rise or even fall than emergency assistance may also have to be sought from the IMF. The finance minister is required to start the process — the process of renegotiation with the IMF — without any further loss of time.
Copyright Business Recorder, 2022