Pakistan is scheduled to receive the remaining $3 billion under the International Monetary Fund’s (IMF) $6 billion loan programme over the next seven months, which will help stabilise foreign exchange reserves and strengthen the rupee.
The IMF has released $1.05 billion after completion of the sixth review, taking the total amount to $3 billion so far under the Extended Fund Facility (EFF).
“According to a recently released country report, the remaining $3 billion will be received in three tranches coinciding with March ($965 million), June ($965 million) and September ($1.05 billion) reviews, while the programme will conclude in September 2022, as per schedule,” said Ismail Iqbal Securities Head of Research Fahad Rauf.
In a commentary titled “IMF Sixth Review – Focus on SBP Autonomy, Energy Reforms and GST Rationalisation” on Saturday, he added that the delay in IMF’s programme revival was creating uncertainty in the stock and foreign exchange markets.
“Since the programme has been resumed now, the balance of payments gap is fully financed,” he said.
“The rupee is expected to stabilise (over the next couple of months),” he predicted. “It will also improve investor confidence in the stock market as most of the reform measures are structural in nature and will benefit the economy and listed companies in the long term.”
The commentary, based on IMF’s sixth review of Pakistan’s economy, suggests that the country’s external debt would continue to mount during the ongoing fiscal year, however, it would start receding from next fiscal year (2023) onwards.
“Government’s external debt-to-GDP ratio is expected to reach 30% in FY22 (28.5% in FY21) before gradually coming down to 25% by FY26,” Rauf said.
The IMF’s projections, however, showed that the Pakistani currency would hit Rs199 against the US dollar during fiscal year 2026, maintaining its average depreciation in the range of 3.7-6% per annum.
The currency appreciated Rs1.04 (or 0.6%) and hit a two-and-a-half-month high of Rs174.48 against the US dollar in the inter-bank market on Friday.
Noting that the rupee has maintained its uptrend in recent days, Finance Minister Shaukat Tarin said that the currency would continue to appreciate.
The rupee recovered a total of Rs2.5 (or 1.41%) over the past six consecutive working days, according to the State Bank of Pakistan’s (SBP) data.
IMF’s projections suggest that the collection of tax revenue would increase by a notable 28% to Rs6.1 trillion in the ongoing fiscal year compared to Rs4.764 trillion in the previous fiscal year ended June 30, 2021.
Similarly, Pakistan’s current account deficit, fiscal deficit, exports, workers’ remittances and inflation reading would improve from fiscal year 2023 onwards.
The IMF has urged the SBP to unwind housing and construction incentives such as mandatory lending targets for banks and lower risk weight on REIT (Real Estate Investment Trust) “as it can hurt financial stability.”
“IMF also highlighted this as part of April 2021 review but no action was taken, however, considering the SBP Amendment Bill, it cannot be ruled out now. If implemented, it could impact demand for construction and allied industries (cement, glass, steel and tiles).”
The government, through the mini-budget, unwound numerous incentives provided in the FY22 budget, however, the “IMF has recommended the removal of exemptions on fertilisers and tractors in FY23 budget.”
The government has sought time to replace exemptions with subsidies. This might impact the fertiliser sector as previous subsidy mechanism did not prove to be fruitful and companies have started to book provisions on the same. On the other hand, higher taxation can dent the demand for tractors.”
The increases in the electricity tariff have been made to a large extent, “while further increases are likely in near term. This would impact plants that heavily rely on the power grid like steel industry,” the analyst pointed out.
However, more important would be the increase in gas tariffs, which was last done in September 2020. “As per the document, the government is working on revising the end-user prices.
Moreover, OGRA (Oil and Gas Regulatory Authority) Amendment Act has been made a new structural benchmark which would allow recovery of full gas cost. These measures could impact gas intensive industries like fertilisers, chemicals, and textiles (especially the ones based in southern region of the country).”