Moody's says challenges will remain in the form of too many imports and borrowing related to CPEC projects
Entering the International Monetary Fund (IMF) programme would be credit positive for Pakistan because it will provide access to a cheap loan to shore up the country’s dwindling foreign reserves, but external and fiscal challenges will remain, Moody’s Investors Service said in a report on Wednesday.
Support and technical assistance from the IMF would help the government achieve macroeconomic stability and make structural reforms. However, the country will continue to face challenges, particularly in light of investments, imports and external borrowing related to projects under the China-Pakistan Economic Corridor (CPEC), it says.
On October 11, the IMF confirmed that Pakistan had formally requested financial assistance to address ongoing macroeconomic and fiscal challenges, the most urgent of which is the critically low level of the country’s foreign exchange reserves.
Pakistan’s macroeconomic and external imbalances have risen since the country’s previous IMF programme finished in 2016. In particular, the dollar reserves adequacy has fallen from $18 billion at the end of the 2016 fiscal year to $8 billion today, barely covering two months of goods imports. This is below the IMF’s minimum adequacy threshold of three months.
The critically low level of dollar reserves means Pakistan faces risk of a default. In order to continue paying for essential imports, like oil and machinery and repay its foreign debt, the country needs to shore up its dollar reserves by at least another $8 billion — it needs $30 billion to meet its total external financing needs for the current financial year, which ends in June 2019.
We have reached this situation because of a high current account deficit. This is because our imports (dollars going out) are more than twice our exports (dollars coming in). Basically, for every dollar we earn, we spend $2.2. In the 218 fiscal year, we imported goods worth $55.8 billion but our exports amounted to only $24.7 billion.
Higher government spending has also contributed to the macroeconomic imbalance we are facing today. The government is spending more and earning less, which leads to an annual loss (deficit) of Rs2.2 trillion. As a result, it is left with little money to spend on development (roads, schools, hospital, parks and dams for example) and has to resort to borrowing. It borrows more to pay for the previous debt and the cycle continues.
To deal with the situation, the central bank has depreciated the Pakistani rupee approximately 25% against the dollar since December 2017 and brought up the interest rate (made borrowing expensive to achieve stability) by a cumulative 2.75% to a three-and-a-half year high of 8.5%. But the current account deficit is still high.
An IMF programme will not only bridge the financing gap but also serve as a strong signal to other official sector creditors that will be crucial to meet financing requirements over the coming years, Moody’s says.
The government has pledged a reform-based policy agenda, including raising economic competitiveness through pro-business policies, addressing corruption issues, reforming state-owned enterprises, enforcing greater discipline in government spending and broadening the tax base. For example, it has started a drive against tax evasion and has already served notices to about 400 suspects earlier this month.
However, Moody’s still believes external and fiscal risks will remain significant if further macroeconomic adjustments are not made. Ongoing implementation of CPEC projects and higher oil prices will keep the import bill elevated, it says.
Prime Minister Imran Khan once again hinted that they don’t want to go the IMF and are in talks with friendly countries for help. He is scheduled to fly to China next month.
Islamabad already made a formal request to the IMF only days ago. The PM will hold a cabinet meeting Thursday and whether or not to enter another IMF programme will be part of the agenda.