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The IMF first review is successful. Does it mean that the economy is out of woods? Not yet. The signs of stabilization are in sight, but it is a long way to go. The key is to sustainably bring down fiscal deficit, and create external buffers. The most common element on external position is to see the gross country reserves – and SBP gross reserves within it. But scratching the surface, by subtracting the reserves related liabilities, a more realistic position can be seen via Net International Reserves (NIR).

The NIR stock is defined by IMF as the dollar value of the difference between usable gross international reserve assets and reserve-related liabilities, evaluated at the program exchange rates. It is an important indictor as it shows the actual position of reserves. It is about the amount the central bank has to finance the current account deficit by its own – in short it depicts, how much import led growth a country can afford.

In simple words, think about your bank account – if you borrow from a friend to strengthen your statement for some business or visa purposes – but you promise your friend that you cannot use this money. That means just window dressing. It is different from any loan you have taken which you can use – such as cash facility, working capital need or asset backed loan.

The NIR is the amount which gives central bank or a country leverage to run pro-growth policies where the import increase can be absorbed by the country. However, when the NIR runs in negative, any external shock can create massive crisis – crippling the economy by free fall in currency which can be followed by hyper-inflation. And to avert it, the promises from balance of payment supporters (IMF, friendly countries, swap positions on FE25 accounts) are required to stay around.

Such weak economic position leads to political, security and other compromises. That has been the situation of Pakistan for the start of 2018 when the NIR became red. The IMF also sees the NIR with critical interest to safeguard its loan – floor on NIR is one of the six quantitative targets.

The NIR was healthy upon conclusion of the last IMF programme in Oct 2016. End-Sep 16, the NIR was $7.5 billion and the SBP gross reserves were $18.1 billion. The current account deficit started slipping right after the exit from the Fund programme –from $1.6 billion in Jul-Sep16 to $3.0 billion in Oct-Dec16, and peaked at $6.3 billion in Apr-Jun 18.

The cumulative CAD between Oct16-Jun119 stood at $44.5 billion and not all of this could be financed by usable reserves – NIR fell by $23. billion between the same time – out of which SBP gross reserves fell by $11.2 billion and $11.8 billion were non usable reserves. The remaining $21.7 billion is financed by other elements – such as FDI and usable borrowings.

Now the efforts are on two fronts. To lower the CAD to stop bleeding, and to build reserves beyond balance of payment support. That is why the need of borrowings from Euro bond and foreign portfolio investment is imperative. But the risks of foreign portfolio investment commonly known as hot money, are also known.

That is why it is emphasized that the SBP builds reserves by buying from the market. It is happening as in the week ending Nov 1, the SBP gross reserves increased by $444 million and out of it around $250-300 million were bought from the local market i.e. people converting their dollars (both from FE25 and cash holdings). That is the first healthy sign seen in a long time. This will help build both reserves and NIR – without borrowing.

The NIR is still around negative $14 billion versus positive $7.5 billion in Sep-16. To reach that level, over $20 billion building of reserves is required. And that can be linked to the discussion whether this could be the last IMF programme. Governor has been saying that fall in reserves is the main reason for frequent IMF programmes – the build-up should be to such levels that economy should be able to absorb tens of billions of reserve drainage in a year or two.  More on that, later.