The current account deficit came down to 29 months low in Feb-19, and the trajectory is changing (read "Current account in order - fiscal's turn now"). Does that mean the balance of payment worries are over? Well, seeing from the IMF lens, the days are tough ahead. We are zeroing into the Fund programme, and have to evaluate numbers from IMF accounting ways.
Net International reserves (NIR} is the number that the Fund uses to dictate the policy prescription - be it interest rates or currency adjustment. This piece is depicting the position of NIR- in Sep-16, two and half years ago, when the reserves started falling amid persistently high CAD. That number is compared to what it is today, and this could give a clue that how adamant the IMF would be for further tightening.
It is pertinent to note that NIR calculations are debatable as using different accounting techniques could change the picture. For simplicity, IMF method is deployed here. Back in Sep-16, according to an IMF report, when the SBP gross reserves were at $18.5 billion, the NIR stood at $7.5 billion. The NIR is calculated, by subtracting, IMF liabilities, Chinese currency swaps, liabilities with other central banks and forward/swap position.
In Feb18, by the time currency and monetary tightening started, the NIR came in negative territory while the SBP gross reserves were $12.7 billion. Since then, there are deliberate efforts of slowing down economy to lower the twin deficit and that took its sweet time to yield results, as finally the steep CAD is cooling.
But in the meantime, the NIR kept on falling - as of Jan-19, the SBP gross reserves stood at $8.1 billion while the NIR is at a staggering negative $11.1billion. Since Aug18, the time PTI is in power, the NIR fell by $4.6 billion - around $900 million per month. The IMF loan has virtually remained unchanged in the past 30 months, but other liabilities on SBP balance sheet have increased significantly. The money coming from friendly countries - as deposits with SBP, is not used in NIR computing. Similar is the case for growing swap and forward positions.
The IMF would straight away ask to build up the NIR and for that, not only gross reserve building exercise is required but also to get loans by government, not SBP. For instance a Euro bond ($1bn) is retiring next month and a same amount of Sukuk is maturing by the end of the year. Asad and team, seven months down the road, have not seen any resolve to raise money through global capital market. The only half hearted attempt to-date is Pakistan Banao Bond which is yet to show any results.
Seeing all this, the IMF would push for further currency and exchange rate adjustment in an attempt to improve NIR position. The decline of NIR in past thirty months is around $18 billion and the government needs a similar time of austerity to build these back. The IMF will have a condition of quarterly targets of NIR and seeing the current position, the Fund may be asking for further front loading.
The government needs to negotiate. It is required to put the foot down on IMF's misplaced accounting treatment. Why can’t it have SBP debt included in NIR? Concurrently, government needs to build external debt on its own balance sheet by issuing bonds and raise from other commercial ventures.
The IMF debt will not help improve the NIR, as the Fund subtracts its liabilities too. Another pertinent point, further currency depreciation may not cut for building NIR as currency is close to its fair value, and the impact on CAD is visible now.