OPINION – IMF $ 6 Bil 39-Months Lending for Pakistan

Pick from IMF Statement is in BOLD LETTERS. My Response is in normal FONTS.

–Balanced growth and increase per capita income = Growth will depend on availability of Liquidity and Credit provided by Banks to Private Sector to stimulate economy, which will assist to increase per capita income.

–Fiscal consolidation will help to reduce public debt = Public Debt can only be reduced after lowering Cost of Borrowings, by meeting Tax Targets and by curtailing spending that will create Fiscal space.

–A flexible, market-determined exchange rate will help to restore competitiveness, rebuild official reserves = Practically building of Fx Reserve without INCOME GENERATION is a difficult task and or unless Import stays at current levels and simultaneously either annual Exports reaches USD 40 Billion and or Remittances surges well beyond USD 38 Billion per annum.

–The approval will unlock from Pakistan’s international partners around USD 38 billion over the program period. This refers to future borrowing needs and support. Such Bailout package is a stop gap arrangement that will only support Balance of Payment problems for next 3-4 years. Unless the Economy identifies and captures profitable areas of businesses to generate income, it will only increase the size of Debt in same proportion, which means nearly additional USD 25 billion funding will be required, if policy rate is not sharply slashed, addressed or rolled over, debt could get close to nearly USD 140 billion. Based on above calculation, Debt financing amount may exceed by more than half of the current total financing at a sharp pace.

-The EFF supported program will help Pakistan to reduce economic vulnerabilities = Agree, as Pakistan will temporarily get some breathing space.

–The FY 2020 Budget is in important initial step = Suggests that Budget targets are in line with IMF expectations. Deviation for targets will be difficult unless IMF gives a nod, which is spread out in broader areas that covers large part of economy.

–Protecting the most vulnerable from the impact of adjustment policy will be an important priority = IMF prefers spending Rs 200 billion Tax Payers money annually on poor through BISP or EHSAS schemes programs rather than encouraging banks to lend money to Private Sector so that new businesses activity can take place.

–Flexible Exchange Rate and adequate tight Monetary Policy will be key to correcting imbalances, rebuilding reserves and keeping inflation low = IMF is of view that market should be allowed to determine the value of RUPEE and to adequate degree Hike Policy Rate. Unfortunately recent hike in policy rate is unbelievably high versus FY end inflation rate of 7.34%, which is below 60-years average of 7.75%. Last FY Rise in inflation is not caused by DEMAND PULL INFLATION (take a look at Bank Deposit/Advance Ratio for reference). It is COSRT PUSH INFLSATION caused due to hike in prices of Petrol, Gas, Electricity, higher taxes etc. IMF’s outlook says that it will help to correct the imbalance and at the same time it will help in reserve building that will assist in lowering inflation low.

Data of past 10-years does not support IMF’s view, it depicts a different story. In past decade, Rupee has been Devalued/Depreciated by 152 pct, from Rs 62 per USD to Rupee 156.5 per USD. Similarly gap between Policy/Discount Rate and Inflation has never narrowed down despite inflation rate falling below 3%. However, Hawkish policy has inflicted severe damage, pushing DEBT (External & Domestic) higher by more than Rs 12 Trillion, which should not have been more than two-third of current size.

–Addressing structural weakness in energy sector and improving the governance of state owned enterprises will ensure efficiency and better services, boosting economic activity. =In simple terms to correct structural imbalance, IMF is asking for Privatization of state owned enterprises targeting loss making enterprises. It does make sense, but not at the cost of National interest.

–To fight corruption and enhancing the AML/CFT framework will create an enabling environment. = This is Blessings in Disguise, as it discourages all wrong doings and will overall is beneficial for the nation.

–The strong financial support to the authorities’ policy efforts by Pakistan’s international partners is essential to meet the large external financing needs in the coming years and allow the program to achieve its objectives. = This is true to some extent, but history of previous 20 times borrowing from IMF suggest, it is only temporary stop gap arrangement. The country cannot and should not solely depend on foreign borrowings. The bigger objective should be to plan out a strategy to repay back loans by generating income.

-The legacy of misaligned economic policies, including large fiscal deficits, loose monetary policy, and defense of an overvalued exchange rate, fueled consumption and short-term growth in recent years, but steadily eroded macroeconomic buffers, increased external and public debt, and depleted international reserves = Overall Economic Data released during this decade suggest that sharp rise in DOMESTIC AND EXTERNAL DEBT, LOW REVENUE COLLECTION and PATHETIC EXPORTS PERFORMANCE is due to weak/unsupportive policies that had failed to generate income exceeding the spending.

CONCLUSION

Past evidence of previous 20-IMF programs suggest that it will surely give boost to the market, sentiments will improve, creates goodwill and hence, further overseas borrowings will be cheaper and easier to obtain. But this is always temporary.

However, it is pertinent to note that IMF funding facility spread over 39-months is largely based on quarterly installments. In past funds were only released after meeting the agreed targets or by obtaining wavers. This time too, the challenge is immense, targets are difficult to attain and wavers will be required

Depreciation of Rupee, Hike in Policy Rate, increase in the size of Derivatives, carrying Unfunded Debt of Rs 3.144 Trillion in books, further breaching of FRDL act or increase in Circular Debt and its parking could be the easiest job. But higher government borrowings, missing of NFA, NDA and revenue collection targets that has many other linkages will be difficult task to manage and may once again add pressure on different section of economy, suggesting 12-15 wavers will be unavoidable.

After opting for IMF funding, the most difficult task for the present government will be to meet quarterly targets and to focus on its party manifesto. Only time will confirm if the Nation is able to absorb the heat or if Pakistan will end IMF deal earlier that should not be surprising.

IMF PRESS RELEASE=   https://www.imf.org/en/News/Articles/2019/07/03/pr19264-pakistan-imf-executive-board-approves-39-month-eff-arrangement

(Disclaimer applies in my post, which means that the perspective is my personal view. I have made every effort to ensure accuracy of information provided. However, accuracy cannot be guaranteed. This article is strictly for information and not intended for Trade or Business Transaction).