Pakistan eyes $1.2 billion IMF package

If January 2023 was a bad start, February 2023 so far has brought the worst fears true. Pakistan’s biggest success in the last fortnight has been getting the IMF back on the table. That is as far as good news go, because the 10-day talks did not yield to a Staff Level Agreement sending another panic wave in the market already low on confidence. The talks with the International Monetary Fund (IMF) continue as Pakistan authorities rush to announce prior revenue measures in order to get the IMF release the much-needed final tranche of $1.2 billion.

Here are key events to watch out for:

1.????The political turmoil refuse to fade, as the government and constitutional institutions are now at loggerheads over announcement of elections. Any delay in announcement of election date is only going to add fuel to the fire, and there could be another fresh round of countrywide protests and unrest. We believe, elections are imperative for investors to have any semblance of hope and political stability. The likelihood of elections being announced as per constitution is getting lower day by day – which in turn raises chances of further political instability.

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2.????Pakistan’s foreign exchange reserves held by the State Bank of Pakistan have dropped to $2.9 billion – lowest in 9 years. Dwindling reserves now cover less than three weeks of imports, as remittances and export dollar inflows have slowed down in the last four months. The artificial currency peg held by the government for four months led to increase in use of informal channels of remitting money back home, and exporters holding back proceeds in anticipation of currency adjustment. We believe, even unlocking of the IMF program will keep Pakistan on the brink, as external payment obligations far outweigh expected dollar inflows for much of 2023.

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3.????Authorities have made significant upward adjustments in energy prices to appease the IMF – raising tariffs for electricity and gas, while maximizing tax on petroleum. The CPI inflation at 28% is already the highest in 48 years, and another round of inflation is expected as prices will adjust to high dollar parity and administered prices. We believe the central bank will further tighten the monetary policy in the upcoming review, and could take the policy rate to as high as 20% -a level never seen before in the country’s history.