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A rumor is circulating on an agreement with the IMF on a $12 billion package soon. BR Research channel checks confirm that it is only a rumor. Based on the financing gap and other available sources, government is eyeing $6-7 billion package and news regarding IMF mission visit may be revealed soon.

The story should revolve around the conditions IMF is pushing for, not the deal size. In case of funding, it is the IMF's letter of comfort that opens up avenue of other sources which is more important than what Pakistan could get directly from the Fund. Hence, the pertinent point is how soon is soon.

In a week’s time, the next visit from the IMF team will be finalized where the negotiation rounds may culminate. If everything goes, as per plan, the programme will start, after the FY20 budget presentation and approvals. A safe bet is to assume the programme initiation by July.

That is the timeline if everything goes as per plan. The tough part is negotiations, as government may not have sound plans on energy and fiscal side while the SBP lacks depth in currency management. At this point, Fund is showing some flexibility against a rigid stance which was in the last moot.

The government is reportedly sharing energy financial management plan with the IMF. It is hard to see any concrete plan coming from both divisions in energy ministry as lack of coordination and competency can be gauged from mismanagement in handling in RLNG demand and supply, indecision on clearing circular debt to a name a few.

The talk is that government is submitting a financial plan of zero build up of circular debt from now onwards. Recent observation of NEPRA is on the abnormality in energy mix - running inefficient low priority power plants over RLNG and coal. Given such management, if the government does not have a magic wand, it is hard to comprehend a viable plan without further increasing the energy tariff.

The other plan to be shared and negotiated is the revenue and expenditure forecast and that has to have some new revenue measures and cost cutting solutions – to be presented in next budget. Since, the programme is more tilted on front loading, the signing of the programme will be after the announcement of measures to curtail fiscal deficit in upcoming budget. The measures could well be tough and un-populous.

The other two elements are interest rates and exchange rate - both are in the domain of SBP. The IMF is showing some flexibility here. The Fund is moving away from absolute numbers - to workable solutions for building up of reserves. The issue is of depleting reserves, and if the SBP can build reserves without further currency depreciation, the IMF would be fine. And interest rates are pegged to exchange rate movement for balancing interest rates differential and keeping inflation in check.

The SBP is supposedly working on a framework on how the institution is intending to manage exchange rate and how this will link to build up of reserves. At this point, the modus operandi is that SBP calls a few banking treasurers every morning and sets the tone. The currency management has to go beyond this blatant exercise of 'dirty float'.

An easier way is to peg currency parity to REER - the number inched up a bit to 103.17 in Jan, but that is not a worry. As long as REER is in band of 95-105, currency is close to its equilibrium. (read "Dollar dairy, don't go the Dar way' and "Currency equilibrium - almost there")

The issue is how the SBP will work on building reserves. The institution which is lately becoming political can trigger a panic button at any time. If the IMF does not accept the plan, some more adjustments cannot be ruled out.

Copyright Business Recorder, 2019

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