IMF: delay deadliest form of denial?

Updated 18 Mar, 2023

EDITORIAL: The IMF (International Monetary Fund) Staff-Level Agreement (SLA) is still awaited. State Bank of Pakistan’s (SBP’s) forex reserves are a paltry $4.3 billion, and there is no clarity about external debt repayments, which have yet to be promised to be rolled over in the next few months.

There is also a backlog of payments of imports goods (stuck at ports) and services; and profit repatriation payments that have been in the queue for a long time.

Apart from these, there is a need for essential or critical imports. Without these essential items, life in the country would possibly come to a standstill. This is indeed a huge challenge, to say the least. And even if the Staff-Level Agreement (SLA) is reached, it will be a lifeboat till June.

The question is what will happen next? The IMF is pressing for financing assurances from the friendly countries. Without building up or boosting reserves, even the IMF tranche and other arranged sources would be insufficient to fully overcome the challenge of looming default.

The friendly countries are more interested in making investment, and that money will come in slowly with an impact in the medium to long term. However, the money ($2-3 billion) must flow in before the IMF board’s approval. The SLA is waiting for these assurances.

Meanwhile, the government plans to maintain the essential imports, particularly in case no inflows come in. The country can only service external debt with new debt or non-debt capital flows.

Therefore, foreign exchange earnings (exports and remittances) must be used for imports by keeping the current account forcefully in balance. And once the debt moratorium is applied, opening LCs would be extremely difficult, if not impossible. Currently, in some cases, foreign banks are not confirming oil LCs, while others are charging a premium.

In the event of default, there are implications for exports as foreign banks’ relations with companies doing business in Pakistan will become strained, which could also hurt exports. The growing energy costs and impediments to importing raw materials will also impact exports.

Already, the hit is visible in textile and other export-oriented sectors. And finally, the gap between interbank and open markets, black and interbank markets and black and open markets will further widen, hitting the flows of workers’ remittances through official channels.

Under these circumstances, according to a Business Recorder report, the government requires $8.5 billion to meet its import needs between March and September — the money will be spent on crude oil imports, petroleum imports, LNG imports, and some parts and machinery imports.

The plan appears to be essentially aimed at energy imports. In 1HFY23, the petroleum group imports stood at $9.3 billion, and the estimates of these imports for the next six months are $8.5 billion as prices and consumption fall.

However, the government would also need other essentials’ imports and require certain industries to function and keep the economy afloat. The government must come up with some austerity measures to lower energy imports by shortening the working week and applying daylight saving measures.

The increase in the tariffs of petroleum and electricity would reduce the demand for these, and the forced slowdown in imports will suppress the industrial energy needs. The government may develop load-shedding plans of at least 6-8 hours in urban areas.

That these are extraordinary times is a fact. Needless to say, extraordinary times call for extraordinary measures or steps. With every passing day, not only is the number of jobless people increasing, inflation is also rising.

Against this backdrop, further curtailment could be very painful. That is why a deal with the IMF is of paramount importance; and the following year’s plan must be charted out carefully.

Unfortunately, however, the challenges are only mounting and they are likely to mount further in the protracted absence of political stability.

Copyright Business Recorder, 2023

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