With the economy under severe strain, as seen by depleted foreign reserves, a widening current account deficit, and the rupee plunging to new lows, Pakistan must rush to resurrect the IMF programme to avoid a repeat of the Sri Lankan disaster.
“To get back into the programme, the government needs to roll down petroleum and energy subsidies as quickly as feasible,” said Tahir Abbas, Head of Research Arif Habib Limited.
“It will be extremely difficult for the government to meet its debt commitments without the continuation of the IMF programme,” he added, “since friendly country rollovers and inflows from other multilateral institutions will only be possible if an agreement with the IMF is reached.” “Capital raising from the foreign market would also be much easier following the IMF’s approval.”
The State Bank of Pakistan’s foreign exchange reserves have fallen from $16.4 billion in February to $10.5 billion at the end of April, with only 1.57 months’ worth of import cover. Since May 2020, reserves have been at this low level.
“There is ambiguity about the IMF program’s revival, as well as the contingencies of friendly nations’ deposits and their rollover to the program’s resumption,” Abbas added. “In addition, the federal government’s lack of direction on important economic policies and a future roadmap is putting pressure on markets across the board.”
The Sinking Rupee
On Wednesday, the Pakistani rupee surpassed 190 against the dollar as the incumbent administration faced hard decisions such as raising petrol prices or risking an economic disaster.
“The rupee is in trouble because one of the primary challenges is payment pressure, while foreign reserves continue to dwindle,” says Zafar Paracha, General Secretary of the Exchange Companies Association of Pakistan (ECAP). “In order to access cash from other foreign creditors, Pakistan must obtain IMF permission and meet its requirements.”
“Otherwise, due to forthcoming debt payments, the value of the rupee may drop more, reducing FX reserves,” he warned.
What If Roshan Digital Account Was Not Launched?
Roshan Digital Account (RDA) inflows surpassed $4 billion in April 2022, after being launched in September 2020 amid the COVID-19 epidemic. During April, inflows totaled $245 million.
“If Roshan Digital Accounts had not been created, Pakistan’s foreign exchange reserves would have been in a crisis state,” stated Salman Siddiqui, an experienced economic journalist.
“We would have a catastrophic situation as the country may have slid into bankruptcy like Sri Lanka,” Siddiqui added without RDA and the backing of Saudi Arabia and China. He stated that Pakistan had avoided insolvency in the past by borrowing from friendly countries, consenting to IMF terms, or issuing bonds.
According to figures from the central bank, Pakistan’s current account deficit increased to $1.03 billion in March from $519 million the previous month. Following a 3.2 percent drop at the start of the week, the KSE-100 dropped 641 points, or 1.5 percent, on Wednesday.
“The market has displayed symptoms of concern again after a few days of political clarity,” said Faizan Ahmed, former Head of Research at BMA Capital. “This is a really unique occurrence. For the first time, friendly countries have declined to provide a helpful hand.”
All countries want Pakistan to resume the IMF programme so that things may return to normal, but the current political environment prevents the current structure from accepting IMF criteria, according to Ahmed.
He explained, “They can’t raise gasoline prices by accepting IMF criteria.” “It would harm their political standing.” People might think you’re doing the same thing you’re criticising.”