Pakistan is estimated to require a financing of $31 billion in the current financial year in order to ensure macroeconomic stability, states Citi Research in latest report.
It is estimated the gross external financing requirements in FY 2019 are about $31 billion. The report uses IMF projections on maturing short-term external debt, current account deficits and general government amortizations.
The report said that the external debt service (principal and interest) alone will rise from $12.4 billion in FY 2018 to $19 billion in FY2020.
This is almost twice the nominal amounts the country faced when it went into its last IMF program. Thus, a much larger program would likely warrant more prior action and stringent requirements from the Fund than before, the report forecasted.
All (Bumpy) Roads Lead to the IMF
Citi states that the government is very likely to seek an IMF program. The sheer size of Pakistan’s external financing gap and an experienced list of technocrats advising the government on economic issues will likely lead to the same conclusion – that not going to the IMF is a far more economically and politically painful/riskier option than otherwise. A decision to approach the IMF may be made by end-September.
We think the IMF and other major stakeholders will be supportive of a program. The IMF seems very ready to engage the government and could mobilize quickly. We think the US will be supportive as it sees a stable Pakistan economy in its best interest geopolitically, and China (and Saudi Arabia) would be supportive as it does not want to be the “lender of last resort”.
IMF is unlikely to be critical of China’s engagement with Pakistan including CPEC, and China will unlikely be opposed to more data transparency that a program would entail. The program is likely to be more stringent than in the past, which could lengthen negotiations.
With this being potentially Pakistan’s 22nd IMF program and larger than in the past (we forecast gross external financing requirements to reach $31 billion in FY2019 from $27 billion in FY2018), we think the IMF will want to create a more effective program than in the past. We think the US will want more structural reforms and IMF will require authorities to have more ownership of the program and seek consensus among key political players (e.g. provincial leaders, parliament).
A credible IMF program should help unlock more funding from other multilateral and bilateral lenders and the private sector that would attenuate the size of their macro adjustment needed to stabilize their external accounts. Like its predecessors, the new government could sell the IMF program to the public as a necessity, brought about by bad policy choices of the previous government.
Govt’s Different Measures For Economy
On fiscal, reversing income tax cuts in the FY19 budget, broadening the tax base, increasing excise taxes, improving tax administration and curbing current spending, especially from the provinces, will be key. SBP can also hike rates at least by another 100-150bps and the rupee has more room to depreciate to help curb imports.
Public Sector Enterprises (PSEs) restructuring, tariff hikes and possible privatization will be on the agenda given the sharp build-up of PSE debt. Restructuring SOEs including tariff adjustments for better cost recovery and privatization will likely be in the government’s reform agenda, though no details have yet been unveiled.