Both the IMF and the finance minister have declared that Pakistan is “fully financed” for FY20 to meet its external requirements. This news should instill some confidence in private sector and foreign companies operating here. Though it doesn’t mean Pakistan is out of the woods just yet. And it appears that there are potential risks that can swell the financing needs and jeopardize some of the financing sources.
The Fund has projected Pakistan’s gross external financing requirements at $25.6 billion for the ongoing fiscal. This figure is broken down into i) $6.7 billion under the projected current account deficit, ii) $18.1 billion under foreign debt-servicing and iii) a $757 million repayment to the IMF on account of past borrowings.
Financing for those needs is expected at $27.6 billion. This includes $2.1 billion in net FDI, $6.2 billion in private-sector borrowing, $1 billion from government’s commercial loans and/or bonds, and $17.6 billion from non-IMF official bilateral and multilateral creditors. Add in the $2.4 billion in IMF borrowing and it will leave Pakistan by FY20-end with a $4.4 billion increase in gross official reserves. Not bad!
Looking at the projections, it is clear that the government needs to arrange about $18.5 billion in financing (after accounting for IMF-related inflows and outflows). The Fund has acknowledged that Pakistan has received financing commitments from a number of bilateral and multilateral sources. Not only that, many of these sources have committed to maintain financing that was extended in FY19.
On top is China, which will provide $6.3 billion in official and commercial financing this fiscal – up from $2.2 billion in FY19. Saudi Arabia will furnish support that is valued at $6.2 billion; the UAE will pitch in another $1 billion. The two GCC allies together provided Pakistan with $5 billion last fiscal. Among the multilaterals, Asian Development Bank is expected to disburse $1.6 billion, World Bank $1.3 billion and Islamic Development Bank $1.1 billion.
However, the above-mentioned scenario, which has a bottom-line of $11.2 billion in gross official reserves by FY20-end that will cover for 2.2 months of import cover, may face challenges on three fronts – trade balance, internal politics, and geopolitics. Firstly, the assumption that the current account deficit will reduce to $6.7 billion – 2.6 percent of GDP and almost half of FY19 dollar estimate – is a bit steep.
Following a lackluster FY19, exports may find it difficult to grow at IMF’s projected rate of 8 percent in FY20. International prices of commodities, especially cotton, remain depressed due to slow global demand and US-China tariff war. Moreover, rising cost of doing business at home – with pricier inputs and higher tariffs & taxes – will hurt price competitiveness of major exports. IMF also sees a 5 percent fall in imports; however, crude oil prices will be a major determinant of that, amid supply cuts among OPEC+ countries and global jitters about a US-Iran standoff this year.
Secondly, if the internal political situation grew volatile and gave succor to protests by the business community, the government will find it difficult to comply with the Fund’s conditionalities relating to currency management, taxation measures, and structural reforms to fix public-sector enterprises and the energy market. In that scenario, the Fund may not issue a clean bill of health after its quarterly reviews. That will impact the financing Pakistan hopes to secure from multilateral and commercial sources.
Another looming threat to multilateral and bilateral funding this fiscal is the FATF review in October. The Fund has also acknowledged this risk, noting that “a potential blacklisting by FATF could result in a freeze of capital inflows to Pakistan, jeopardizing the financing assurances under the programme”. Although the IMF and other creditors have an incentive to help Pakistan exit the grey list, the matter is subject to intense geopolitics. Therefore, Pakistan has to do all it can to avoid the dark alley of financial isolation.