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July 10, 2019

Net international reserves stand at negative $17.7 bn: IMF

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July 10, 2019

ISLAMABAD: At a time when net international reserves held by the State Bank of Pakistan (SBP) stand at negative figure of $17.743 billion, the IMF has projected that external debt and liabilities would go up by $20.5 billion in the next three years under the Fund program.

The IMF staff report shows that the net international foreign currency reserves held by the SBP stood at negative $17.74 billion by end June 2019 and it would further go up negative to $18.478 billion by end September 2019. The IMF has placed performance criteria to bind Pakistan for reducing negative net international reserves on quarterly basis. The net international reserves held by the central bank will start declining but it will remain negative at $10.790 billion in current fiscal year till end June 2020.

Meanwhile, the State Bank of Pakistan Tuesday received first tranche of $991.4 million from the IMF. The IMF’s definition indicates that the gross reserves held by the SBP slightly over $7 billion seemed to be consumed through short-term commercial borrowing by the government and after taking into account the liabilities in shape of bilateral deposits from China, Saudi Arabia and UAE as well as IMF’s outstanding liabilities of $6 billion, the total net foreign reserves held by the SBP showed negative level of $17.743 billion, a whopping negative figure which was never witnessed by Pakistan in its whole history.

Amid negative net international reserves held by the SBP, the IMF projected that external debt and liabilities will be increased by over $20.5 billion during three-year period under the IMF programme going up from $104.165 billion by end of fiscal year 2018-19 to $124.688 billion in financial year 2021-22.

The IMF has projected that total public and guaranteed debt would go up by Rs11,000 billion from Rs30,000 billion in 2018-19 to Rs41,799 billion in 2021-22.

The IMF report states that debt is at the limit of sustainability and subject to high uncertainty, but strong fiscal adjustment in the programme and firm commitments from major bilateral official lenders to maintain their exposure well beyond the programme period mitigate risks, therefore, debt is judged sustainable. Public debt-to-GDP ratio remains high, with government and government-guaranteed debt having reached 75 percent of GDP in FY 2018.

“Public debt will only be sustainable with full implementation of the adjustment programme. Under the EFF, a strong fiscal consolidation of 4.5 percent of GDP in primary balance over four years and a recovery in growth supported by structural reforms will help public debt decrease to around 67 percent of GDP by FY-2024.

The IMF says that external debt-to-GDP is projected to steadily decline after peaking in FY-2021 due to smaller current account deficits, capital inflows, and flexible market-determined exchange rates. Importantly, the large gross financing needs are partly driven by continuous rollover of claims to non-traditional bilateral official creditors.

Given these creditors’ firm commitments to maintain their exposure, the underlying gross external financing needs can be estimated to be lower by 1.3 percentage points of GDP on average per year during the programme and beyond the programme period.

“Nonetheless, adverse shocks, notably to the primary balance, economic growth, and the real interest rate, could threaten debt sustainability,” the IMF noted.

The Pakistan government and government-guaranteed debt has been on an increasing path since 2017. Public debt increased to 75.3 percent of GDP by the end of FY-2018, up from 70 percent of GDP in the previous fiscal year, while public debt excluding guarantees reached about 72 percent of GDP. Net public debt also increased to around 67 percent of GDP. Gross financing needs reached almost 34 percent of GDP, up from 29.4 percent a year ago. The maturity structure of public debt has worsened. As of March 2019, 57 percent of domestic public debt had a maturity of less than a year, up from 54 percent in June 2018. Moreover, the stock of short-term debt from the central bank more than doubled in last 10 months, reaching 19 percent of GDP in March, while three-month T-bills declined but remained high at 8 percent of GDP. While the treasury bills are denominated in local currency, which mitigates rollover risk as long as there is sufficient liquidity in the domestic banking system, the large amount of short-term debt raises the government’s exposure to interest rate risk.

The annual increase in short-term public debt has surpassed the upper risk-assessment benchmark as shown in the heat map. The adjustment scenario envisages a re-profiling of the short-term debt held by the central bank, discontinuation of central bank financing, and a gradual decrease of foreign currency-denominated debt to reduce rollover and exchange rate risks.

Strong fiscal consolidation is required to restore public debt sustainability and support adjustment in the balance of payments. The IMF staff recommends an adjustment of 4.4 percent of GDP in primary fiscal balance over four years starting from FY-2020, together with an end to currency intervention.

Front-loaded and revenue-based fiscal consolidation measures of 4.8 percent of GDP are needed to achieve the desired level of adjustment, while currency depreciation supports import related revenue measured in domestic currency.

“However, the resulting higher inflation and interest rate will initially prompt a surge in interest expenditure. The expected drop in the growth rate will negatively affect the fiscal position in the short run, but the expected pickup in growth in the medium term, together with significant fiscal adjustment, will help put public debt on a firm downward sloping trajectory,” the IMF states. Under the programme scenario, public debt is projected to reverse its trajectory from 2020 onwards.

Debt is expected to reach 80.5 percent of GDP in 2020, partly reflecting currency depreciation, but to fall sharply to 67 percent of GDP by FY 2024. Public debt excluding guarantees will come down to 64 percent of GDP.

The external debt is projected to rise to around 37 percent of GDP at end FY 2019 mainly driven by sizable external borrowing, a large current account deficit and currency depreciation. However, under the EFF programme that consists of strong macro policy adjustments and structural reforms, external debt is projected to steadily decline after peaking in FY-2021, returning to a more sustainable path.

The moderation in external debt is mainly driven by a narrower current account deficit, non-debt creating capital inflows and a recovery in economic growth. Gross external financing relative to GDP needs are also projected to steadily fall from FY-2021, declining to around 8 percent over the medium-term.

Importantly, given firm commitments from major bilateral official lenders to maintain their exposure during the programme period, underlying gross external financing needs would be lower by 1.3 percentage points of GDP on average per year during the programme and beyond the programme period.

The IMF has warned that the projected external debt path is subject to heightened risks. Bound and stress tests suggest that the external debt-to-GDP ratio would be adversely affected by shocks. While sensitive mostly to current account and exchange rate shocks, external debt ratio would reach around 60 percent under a real depreciation shock scenario. The heightened risk highlights the need for strong macroeconomic policy adjustments and structural reforms for external debt sustainability. Financing assurances are critical, the IMF stated.

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