It has been more than four weeks since the IMF staff concluded its technical talks for the pending 9th review. Yet, the staff level agreement (SLA) is yet to be reached. The markets are anxious because of the delay. First, the technical talks that were earlier delayed by over three months, were supposed to start in October 2022, were finally concluded in the second week of February 2023, and now it is mid-March, and yet there is no SLA.
The economy has been on a kind of ventilator since then. Imports are being restricted to manage the meager level of SBP reserves with the threat of economic default looming. One by one, industries are shutting down or winding back operations as they cannot import raw materials. In the process, unemployment is on the rise and growth is on a decline while there is no respite from inflation which is setting all-time records.
The question is whether the Fund believes any of the key pieces of the puzzle to be still missing. Three elements are pending, and there is a good chance that these shall be resolved soon, and the SLA shall happen in this week only. First, the Fund needs verification whether the exchange rate is market based or not. The second is the cabinet approval for the revision of power tariff, and the third and the most critical element is verification of the financing assurances provided by the SBP from bilateral partner countries. If pieces fall into place which is likely, the SLA shall happen as well. And then those financing must be in SBP account before the board meeting. Earliest, it can happen in May.
The issue with the currency is very important for the Fund. Since the imports are restricted, fundamentally the currency is not market based. In fact, SBP is buying dollars from the market; but the catch is in micromanagement of imports. It is very hard for the IMF to assess the implied intervention; one gauge that talks about the market value is the rate in the open market. The gap between the interbank and open market must be zeroed in. And SBP must announce a clear plan to open-up imports.
On the gross financing, there is a gap of two billion dollars on the current account deficit where the IMF is counting the backlog which the government is yet to agree with. Now, that seems to be sorted and the total financing need is $4.5 billion including that of WB and ADB. Of this, certain financing assurances have been sent by the SBP to the IMF and the Fund is seeking verification. That also leads to the SLA. The amount is perhaps $2 billion for Saudi and $1 billion for the UAE. Here, some of the confirmation has not come yet.
Moreover, the flows must be poured in before the board’s approval. This includes parts of deferred oil facility and other rollovers. Fund wants the reserves to shore up. These flows remain critical as do the other financing arrangements. Finger crossed.