Next govt likely to raise $6-7 billion from IMF in 2H2018

KARACHI: The government-to-be after the elections this year will have limited options to ease external account pressures and a timely one would be to raise another six to seven billion dollars from IMF – a sine qua non to reintroduce financial discipline into the economy, a brokerage said on Tuesday.

Topline Securities said the government has three options to come out of morass created by weak foreign exchange reserves position as well as widening current account deficit.

Foreign exchange reserves fell to three-year low of $11.8 billion as of March 22 compared with $16.1 billion in the beginning of July 2017. Current account deficit is estimated to close at 5.1 percent of GDP in the current fiscal year of 2018. The current account deficit has already climbed to $10.8 billion in the first eight months of FY2018 as against $7.216 billion in the corresponding period a year earlier.

“There are three likely scenarios that can unfold: strict measures including further rupee devaluation and interest rate hike; entry into IMF’s (International Monetary Fund) program and bailout from friendly countries,” Topline Securities said in economy update. “Government will take strict measures and enter an IMF program in 2H2018 post general elections.”

The brokerage said an IMF program would bring financial discipline and help reduce pressures on foreign exchange reserves.

“We think Pakistan can secure $6 7 billion of IMF loan, out of which $2-3 billion can be disbursed in FY19,” it added. “With IMF’s support, other lending agencies will also feel comfortable to provide funding to Pakistan.”

Topline Securities said the country could avoid return to IMF if the government gets successful in arranging external financing from friendly countries, including China and Saudi Arabia during the next fiscal year, starting from July 1, 2018.

In the recent past, Pakistan signed two IMF’s loan program in 2008 and 2013. Post-IMF programs, current account deficit improved, while fiscal deficit remained on the lower side. The country ended three-year extended fund facility of $6.6 billion in September 2016.

The brokerage said rupee is likely to further weaken, while the central bank would need to tighten monetary policy following a loan facility.

“We expect rupee dollar (parity) to reach Rs136 by June 2020 under IMF program as we anticipate further devaluation of 10 percent in FY19 and 7 percent in FY20,” it added.

“This will be pivotal to arrest demand led import growth in the country and will also be a part of IMF reform process which focuses on more flexible and realistic exchange rate to address external account concerns.”

The parity would be in line with the current real effective exchange rate index of around 110 as against an average 106 during the last 10 years.

Topline Securities further said the State Bank of Pakistan is likely to gradually increase interest rates by 275 basis points to 8.75 percent by FY2020 under IMF program from the current six percent in order to curb spiraling aggregate demand and imports of the country.

“This will also keep positive spread (real interest rates) over inflation rates as average inflation is anticipated to reach 7.5 percent in FY20 from 4 percent in FY17.”

The brokerage said the higher interest rates than inflation help in containing demand pressures and restricting the country’s twin deficits of external and fiscal accounts. Real interest rates during the 2008 IMF program averaged 1.4 percent and averaged three percent during the 2013 IMF program.