IMF review and Chinese relief



March 28, 2022

IMF review and Chinese relief


Asrar Raouf comments upon important financial developments

IMF review and Chinese relief Amidst a spiraling political crisis threatening to derail the current governance system the fortitude of the IMF is quite uprising. Like every other agency IMF is also playing the waiting game that is quite obvious with the difference that an independent financial outfit like IMF is certainly not dependent upon political vicissitudes and it is much easier for it to, at least, temporarily, get out of a messy situation but that is not happening indicating that the decisive powers behind IMF still wish to remain engaged with Pakistan and are showing patience. By doing so it has become obvious that they may be exercising some kind of influence on the fast-changing governance dynamics in the country. Although the rising tensions have somehow impacted the IMF also as is evident by the fact that despite claims made by the highest Pakistani financial managers the talks between the IMF and Pakistan are still far from reaching any definite agreement.
Pakistani financial minister had shown optimism when he announced that the staff-level agreement will be finalised by Tuesday but it did not materialise. This high ranking official also mentioned that the IMF had sought details of financing arrangement placed among the centre and the provinces for financing the PM’s Relief Package for freezing the POL prices and reducing electricity price by Rs.5 per unit till 30 June, 2022. He emphasised that both parties have agreed that the financing for such relief package is available through the provinces and SMEs and secondly now they are verifying whether these agreements exist or not.
He added that the electricity prices were reduced by Rs.5 per unit and this relief had already been provided to consumers. He cited an example that if electricity bill stood at Rs.1,840 last month, it got relief of Rs.805 and the consumers would have to pay only Rs.1,035 this month. He was quite uncomfortable with the query that what is the implication of not notifying the Rs.5 reduction in electricity though he replied that it would be made part of the bill but when it was pointed out that if such action is taken without notification then it might cause an irregularity he simply did not reply.
He emphasised that the country’s current account deficit (CAD) had nosedived to $545 million in February 2022 against $2.531 billion in January 2022. The government and the SBP had taken steps resulting in CAD falling sharply despite some economists’ assertions that it might climb to $20 to $22 billion till the end of the ongoing financial year. He said that exports and remittances performed well while imports reduced massively. The minister conceded that there were some headwinds but the GDP growth was still expected to touch 5 per cent mark for the current fiscal year as Large Scale Manufacturing (LSM) growth had achieved 8.2 per cent in January 2022. The minister also highlighted the declining Sensitive Price Index (SPI) for showing that the inflation was coming down and dropped by 1.37 per cent whereby the SPI stood at 15.21 per cent, which was 36 months low SPI on weekly basis.
He reminded that the SPI stood at 21 per cent last month, indicating that it dropped by 6 per cent. Despite such bold pronouncements it is now very clear that the final outcome of the current political crisis has become the yardstick and solution to this crisis will ultimately bring about further development about this matter. The result is that the situation remains fluid on the ground with the result that the ongoing 7th review might not conclude until this lingering dispute is settled in some shape and form. In wake of the prevailing situation it is also reported that the 7th and 8th reviews under the EFF program might be clubbed together for consensual settlement.
It is also reported that China has become active in trying to resolve the prevailing crisis and it is not only political help but it also pertains to financial field. In this context it was reported, quoting the highest economic figure that China has agreed to rollover $4.2 billion debt that was maturing this week, providing a major financial relief to the government. Accordingly, it was added that the $2bn loan by China’s State Administration of Foreign Exchange (SAFE), has been rolled over as the SAFE deposit loan matured on last Wednesday. Apparently, the visiting Chinese Foreign Minister conveyed China’s willingness to rollover another $2.2 billion Chinese commercial loan and this $2.2bn or RMB 15 billion facility was maturing on Friday.
China has so far stood by its commitments and has been bailing out the country. Beijing had given a commitment to the International Monetary Fund in 2019 to rollover its debt until the Fund programme expires. Pakistani prime minister, during the recent visit to China had sought $4 billion rollover of SAFE deposits loans that were maturing in the next few months. Pakistan had requested a total $21 billion lifeline that included a total $10.7 billion rollover of both commercial and safe deposits. These included rollover of SAFE deposits of $4 billion and commercial loans of $6.7 billion upon maturity. Pakistan has only $15.8 billion foreign exchange reserves as of last week and its currency is fast depreciating.
The rupee fell to the lowest ever level of Rs.181.75 to a dollar in interbank on Tuesday. Pakistan had also requested to increase the size of the currency swap facility from $4.5 billion to $10 billion – an additional borrowing of $5.5 billion. The Currency Swap Agreement is a Chinese trade finance facility that Pakistan has been using since 2011 to repay foreign debt and keep its gross foreign currency reserves at comfortable levels instead for trade-related purposes. The benefit of this arrangement is that the additional Chinese loan will not reflect on the book of the federal government and will not be treated as part of Pakistan’s external public debt. Pakistan had paid Rs.26.1 billion interest on the outstanding balance at agreed rates. Last month, the IMF said that Pakistan owes $18.4 billion or one-fifth of its external public debt to China, which is not only $4bn higher than the officially reported figures but is also the highest lending by any single country or financial institution.
The IMF has made the $4 billion loan given by China to stabilise the foreign exchange reserves part of the external public debt as of June 2021. Out of this, $2 billion matured today but was extended further due to Pakistan’s thin financial position. The amount of $18.4 billion is equal to 20% of the external public debt reported by the IMF in its report. It is also the highest amount given by any country or an institution. The World Bank’s outstanding debt towards Pakistan was $18.4 billion by end of the last fiscal year. According to the IMF, Pakistan’s gross external financing requirements are estimated at $30 billion for the current fiscal year that will increase to $35 billion in the next fiscal year. Pakistan largely bridges its external financing gap by taking foreign loans, as the share of foreign direct investment is estimated at only $2.6 billion for the current fiscal year. Pakistan is facing the dangerous prospects of failing to secure budget support loans by international lenders if it fails to successfully negotiate with the IMF. TW

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Asrar Raouf is a former civil servant


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