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Friday March 29, 2024

New govt may seek IMF’s financial support: analysts

By Erum Zaidi
June 02, 2018


KARACHI: The country might need to knock the International Monetary Fund (IMF) yet again to heal up balance of payment position weakened by swelling debt obligations

during the government of Pakistan Muslim League - Nawaz (PML-N), analysts said on Friday.

The analysts said the central bank currently holds $4 billion in reserves, which are sufficient to clear alone one month of import bill, while the country is already bound to pay $8.5 billion in external debt repayments till June-end.

The upcoming government that is scheduled to take shape after July 25 general elections could face tough balance of payments challenges, they added.

“It is almost certain that we will need another bailout package from the IMF… which essentially means that the PML-N government was not successful in turning the economy around,” an analyst of Tresmark said, requesting anonymity.

A sharp increase in trade gap, fuelled by higher imports, pushed the current account deficit to $14 billion in the first 10 months of the current fiscal year ending on June 30. External debt and liabilities soared 51 percent to $92 billion since June 2013.

The analyst said the PML-N government failed to tackle the root causes of economic woes, and therefore “we are generally worse off in the last five years”.

“Had they introduced import substitution, improved competitiveness, become export centric and attract foreign investment, our current account deficit would not have been at a record low of $1.96 billion,” the analyst added.

The country is losing $250 million on an average on a monthly basis, which has led to foreign currency reserves at the three-year lows, in spite of the fact that the country borrowed $9.5 billion in the last 10 months.

The country successfully completed a $6.7 billion three-year loan program of the IMF in September 2016.

Bilal Khan, a senior economist at Standard Chartered Bank said though the market commended the government’s ability to complete an IMF program and achieve macroeconomic stability “a more flexible exchange rate would have helped manage external-account pressures we have seen build up over the past year.”

Rupee depreciated 16.6 percent since June 2013. Currently, rupee hovered at an average of 115.60.

“Given the challenging balance-of-payments situation, we expect some additional rupee weakness in 2018 and further monetary tightening,” Khan said.

Another analyst said the central bank had very little option but to devalue the rupee sharply in two phases since December 2017. Most analysts believe that a third round of devaluation of around five percent is due right after the month of Ramazan.

Muzzamil Aslam, chief executive officer of EFG Hermes Pakistan sees 5 to 10 percent currency depreciation in the period ahead.

“If there is a gap in the balance of payment, the currency will have to take a hit. The recent hike in policy rate is a beginning before going to the IMF,” Aslam added.

He said the PML-N government has achieved below average performance with weak tax-to-GDP ratio, and stagnant exports. “A soft inflation was due to falling international commodity prices.”

Zafar Paracha, secretary general of Exchange Companies Association of Pakistan said the open market was highly volatile as the rupee closed at 119.50 at the last day of the former government.

Economist Ashfaque Khan blamed the government policies for extremely fragile external balance of payments position.

“Pakistan added $40.3 billion external debt and liabilities during the first 60 years of its independence (while) it added almost $21 billion in the next five years but, to our horror, the outgoing regime is likely to add $34 billion in the last five years,” Khan added.