Review time: IMF nod likely

The IMF board review is due today. Expect some good news. The first review is likely to be passed with flying colours. A strong endorsement from the Fund is expected. The fund has already lowered inflation expectations down to 11.8 percent (it may come down further). It is expected that the Fund may increase the growth forecast of current year to 3-3.5 percent from 2.4 percent. The IMF may strongly endorse the reform story. This will bode well for the foreign investment – both portfolio and direct.

The story of the second review is shaping well. The second quarter is almost over. The government is very much on track to meet all the targets in the second review. The score will be 2 out of 2. The tough part is to start in third and fourth review and the buck may stop at FBR to keep the fiscal primary deficit target on track.

There are six quantitative performance criteria. All were met in the first quarter. For the second quarter, the Fund has allowed relaxation of Rs200 billion for contingent liabilities (ceiling on government guarantees) for energy circular debt Sukuk issuance.  The instrument is already issued.

The second relaxation is of Rs200 billion on ceiling of net domestic assets (NDA) of SBP. That is to enhance the export refinancing credit limit of SBP. The credit subsidy is to be funded by the ministry of finance and its fiscal cost would be Rs15-20 billion. Another Rs100 billion will be provided by the SBP itself. The total credit limit will enhance by Rs300 billion. The focus is clearly on boosting exports and channel checks confirm that the limits are already exhausting.

The most important targets are of fiscal primary deficit and Net International Reserves (NIR). On the fiscal side, there was enough room in the first review where the surplus was of Rs286 billion against the deficit target of Rs102 billion. The cushion created seems to be enough to reach the six months’ primary deficit target of Rs145 billion. The government is using the cushion to accelerate the development spending, which was abysmally low last year.

The IMF is pushing government to increase the speed of PSDP releases. This will help in achieving growth beyond 3 percent. However, poor agriculture performance –especially cotton, may challenge the growth. The slowdown in LSM due to higher interest rates and other factors may become a road block in achieving growth. The better performance lately in exports can partially compensate the slowdown in other sectors.

On NIR, the SBP is sitting at a very comfortable position based on IMF target. The NIR at September end was minus $14.5 billion versus the floor target of minus $18.4 billion. The end December target is minus $16.3 billion. Seeing the fall in foreign currency swap/forward labilities reduction of $1.95 billion in Jul-Oct ($1.27bn in Jul-Sep) the NIR is set to be met for even third and fourth quarters. If the other central bank deposits are converted into loan, NIR would even be better.

The ceiling on foreign currency swaps/forward positon is set at $8,055 million for December end and it was $5,315 million as of November. This is much better than June end target of $7,555 million. The ceiling on net government borrowing from SBP is the sixth target. That is a non-issue as the government has created enough cash buffer in the fourth quarter of the last fiscal. With enhanced foreign fiscal funding and lower than expected fiscal deficit, the SBP borrowing target is a done deal for the whole year.

The word of caution is required. There is no room for complacency. The IMF targets were based on economic situation at the time of entering the programme. The performance has improved at a better pace than expected. The economy is on track to have 5 percent growth in FY22. But the country needs 5 percent plus growth to continue for 8-10 years and for that a much bigger push is required on structural reforms.