IMF review: Job well done

Flying colours it is. All the performance criteria for End-Sep were met comfortably. The credit goes to Baqir and Shabbar for bringing balance of payment and fiscal revenue in order. At the time when the programme was signed, virtually all the seasoned and experienced economists and past MoF gurus were saying that this programme would be short-lived – but a better tone has ben set for quarters to come.

Prior to starting programme, the government had smartly created some cushion on the fiscal side, by having higher borrowing from SBP in 4QFY19, booked the exchange losses of SBP and put aside some funds for future expenditure. Now the fiscal primary surplus is said to be around Rs200 billion for Jul-OctFY20, leaving a room of close to Rs350 billion primary deficit in Nov-Dec for End-Dec target – likely to be met.

The story of floor on NIR seems to be even better. The NIR was minus $14.7 billion in Aug-19 against the target of minus $18.5 billion for End-Sep. The number is already better than End-Dec target of minus $16.3 billion – with SBP accumulating reserves, and IMF assertion, that the release of Fund tranche of $450 million to unlock significant funding from bilateral and multilateral partners, will surely help in building NIR – no problem seems to be in meeting this for second review.

All the remaining four targets are somehow connected with above mentioned two, and if these are met, others are likely to be met as well. But some relaxation on a few others, may help in reviving growth. The buzz is that IMF is giving a relaxation on ceiling onNDA of the SBP stock by Rs200 billion for End-June. The idea is to enhance the credit to private sector primarily for export refinancing scheme of SBP. The other good news for exporters is that they probably will be allowed to convert their refunds into PIBs – moving away from promissory notes. The moves are to boost exports – good for textile sector.

The IMF tone suggests that the Fund has realized the gravity of growth situation, and based on good performance in the first review, some bounties are given to boost growth. The other relaxation is expected on having sovereign guarantees for issuing Rs200 billion Sukuk – government was asking for Rs300 billion, but the Fund agreed on two third of it – this will ease up the liquidity of companies in the energy chain.

Another much needed relaxation on indicative targets is to ease the FBR full year revenues target by around Rs200 billion – still the target seems elusive. The government was eying a package for construction where the idea was no questions asked for real estate development (mainly construction) from income tax point of view. However, the Fund may like to wait another quarter, before giving such booster. At this point, expect some scheme for low cost housing where allocation may come through PSDP.

The Fund has also lowered its inflation expectation for FY20 from 13 percent to 11.8 percent. This is now in line with ADB and SBP’s own forecast of 11-12 percent. The reason for the revision probably is building of foreign reserves and global depressed commodity prices outlook. Some in the market are anticipating a rate cut in Nov-19 based on IMF revised inflation forecast. However, the decision is SBP’s and the central bank inflation forecast is unchanged. Some say that SBP would ideally like real interest rates on expected inflation at 2-3 percent – seeing this, and higher than expected inflation in Oct-19, chances of rate cut in Nov are thin.

The bottom-line is that the story is so far so good, and the cushion created in the first quarter has offered enough buffer for the next two quarters. The government may face some challenge in the fourth quarter. The government does not have time to relax. Much more is needed to take the economy out of the woods, and to continue to meet End-June target.