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The IMF deal is still stuck. The Staff Level Agreement (SLA) is yet to be completed. It’s highly likely that SLA will take place in the next few days followed by the completion of some steps; approval by the board, completion of the 9th review, and money coming to SBP's account. This is needed to bring life to the economy at the brink of default till June. However, the bigger question is what would happen after June, as repayments are huge in the next 12-18 months, and that would require another IMF programme and much bigger financing from friendly countries. Also, for that political stability is much needed- something completely missing at this point.

There are a few pending issues with the IMF. One was the gross financing need. Some sources are saying that SBP has sent these assurances to the IMF, and the Fund has yet to accept them. There are chances that the IMF will agree to those assurances. However, some of that money needs to be in the country by the time the board meeting takes place.

The other issue is that of the currency. It was the top issue and SBP had to bridge the gap between the interbank and open market before the IMF mission could come to Pakistan last month. Even after that, the IMF is not convinced that the currency is market based. It appears they need some kind of proof that the SBP is not intervening. The mistrust is only growing.

The banking treasurers are of the view that there is no intervention by the SBP, given the dynamics of the flows. However, the flows are very much managed, as the imports restrictions are not eased yet. Their removal is one condition of the IMF. Nonetheless, imports cannot be opened completely till the reserves are increased. But eventually these are to be opened, and once that happens, some of the inflows will be consumed in it. And that is taking the gross financing requirement to around $2 billion higher than the claims of the finance ministry. And IMF really wants to know how much the gross financing requirement is.

Then the interest rates will move up as well. SBP expects this year's inflation to be around 27-29 percent while the policy rate is 20 percent. SBP in the last policy statement highlighted that the rise of 300 bps rate has pushed the interest rates into positive territory on forward looking basis. However, the vibes are that more tightening is required; another 1-2 percent increase cannot be ruled out by the next policy review on 4th April and perhaps that is a precondition for the IMF’s board meeting as well.

The bottom line is that even with the SLA and successful board meeting for the 9th review, the country’s macro worries are far from over. These negotiations are giving breathing space till June; and without the SLA, the death (default) is immediate. The real question is what will happen post June. Back of the envelope calculations suggest that the country needs a cushion of around $20 billion in the next two years to steer out of the crisis, avert debt restructuring and move to a growth path after 2 years. Otherwise, it could also take the route taken by Sri Lanka in the last 12-18 months, which is going to be very painful – much excruciating than the pain the country is inflicted with today.


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Haroon Mar 10, 2023 01:02am
The macro worries will only be over when SBP hikes interest rates, firstly, to a real positive rate and then high enough to counter both inflation plus speculative selling of rupee. Right now, people have lost confidence in the rupee because it is offering a far lower return than other commodities or rather the dollar. State Bank surely has to think about currency stability and confidence as well under its mandate of assuring favourable conditions for growth. Country cannot work until interest rates are hiked high enough such that people actually have the faith to hold the rupee. State Bank has to do all it can to avoid the rupee from becoming the Argentinian peso.
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