Pakistan can manage obligations through reforms: IMF

IMF spokesperson distances Fund from award for Dar; Mission chief says never congratulated finance minister

Islamabad

The IMF’s Mission Chief Herald Finger said on Thursday that Pakistan could manage its external obligations in the wake of rebound of oil prices in international market and CPEC related repayments if Islamabad continues its motion on reform path even after completion of Fund sponsored 6.15 billion dollar program.

The IMF’s released staff report on Thursday also assessed that the real effective exchange rate (Reer) in case Pakistani rupee stands at Rs 118 against US dollar. Currently, the existing exchange rate in Pakistan is hovering around Rs104-105 against US dollar in inter- bank and open markets. 

“The current account deficit will go up by 1.5 percent of GDP because of CPEC obligations and oil prices are also expected to go up. We do foresee hiking in the current account deficit but still the situation is manageable. Pakistan can avoid another IMF programme if sticks to the path of fiscal consolidation and structural reform path,” the IMF’s Mission Chief Herald Finger said in video conference from Washington DC on Thursday evening.

To a query regarding winning award by Finance Minister Ishaq Dar from publication of Emerging Market, the IMF’s spokesperson Ms Wafa said that the IMF is not involved in it. However, the IMF’s Mission Chief said that he had not given congratulation to the Finance Minister because he was not present on the occasion of annual meeting here at Washington DC; however, he had congratulated the SBP’s Governor for wining award from Euro Money.

On exchange rate, Herald Finger said that the exchange rate was appreciated in the range of 5 to 20 percent depending on different models, adding that the nominal exchange rate was determined on market determinants. 

When asked about all macroeconomic figures being challenged by independent economists, the IMF chief said that the methodology for calculating figures was used which was internationally accepted and its application should be debated at national level. The figures are good and the IMF is not involved in this mechanism, he added.

He said that 2 million job seekers were entering into labour market per annum and the country requires 7 percent of GDP growth to cater the needs of youth for providing jobs, he maintained.

According to IMF’s staff report released on Thursday stating that the partial recovery in oil prices, higher CPEC-related imports and an expected slowdown in remittances growth will likely widen the current account deficit to about 1.5 percent of GDP in FY 2016/17 for Pakistan. 

However, increased mobilisation of external financing from international markets and the SBP’s continued foreign exchange purchases will likely allow for further foreign reserves accumulation (to about 4.5 months of imports), the report states.

In the wake of CPEC projects, the IMF says that the direct impacts on the external balance are expected to be substantial. During the investment phase, as the “early harvest” projects proceeds, Pakistan will experience a surge in foreign direct investment (FDI) and other external funding inflows. 

A concomitant increase in imports of machinery, industrial raw materials, and services will likely offset a significant share of these inflows, such that the current account deficit would widen, with manageable net inflows into the balance of payments. 

While precise quantification of these impacts is difficult due to uncertainty and lack of available information, staff projects CPEC-related capital inflows (FDI and external borrowing) to reach about 2.2 percent of the projected GDP in FY 2019/20, and CPEC-related imports to about 11 percent of the total projected imports in the same year.

Regarding exchange rate, the IMF report states that risks to the outlook are tilted to the downside. The continued appreciation of the real effective exchange rate, in the context of an appreciating US dollar vis-a-vis the pound and euro, would further erode export competitiveness and affect remittances. Tighter global financial conditions could have an adverse impact on capital inflows. 

By contrast, lower oil prices and a slower pace of increase in international interest rates, owing to the impact of Brexit on advanced economy growth, would be beneficial for Pakistan’s external position and growth. “Medium-to long-term risks could arise from CPEC-related repayment obligations and profit repatriation; lower remittances if the slowdown in the GCC lasts longer than expected; and a more pronounced recovery of oil prices”, it added. Domestically, policy slippages, further delays in restructuring or privatising PSEs, ongoing legal challenges to electricity surcharges and revenue will pose challenges.