KARACHI: Pakistan’s new government is too lax lack urgency to handle economic challenges that may delay a possible finalisation of a much-needed bailout deal with the International Monetary Fund (IMF), a report of Citi Group said on Monday.
“Our only concern is a potential lack of urgency or feeling of a crisis compared to 2008 or 2013 that could be a factor why IMF (International Monetary Fund) program negotiations could drag on,” said the report by Citi Research, which is a division of Citigroup Global Markets Inc.
The research firm said the odds of the government seeking IMF support remain very high given the sheer size of gross external financing requirements that it forecast might reach to $31 billion in FY2019 compared to $27 billion in FY2018.
“We think they (government) could finalise an IMF decision (likely an extended fund facility) by the end of this month,” it said in Pakistan Economics View. Citi Research said the reports of Pakistan’s willing to seek other lender of last resort than IMF has affected the country’s dollar bonds yields.
“With lingering EM (emerging markets) wobbles and nervousness and worries that Pakistan is moving away from the IMF, dollar bonds have underperformed other peers like Sri Lanka in the last month after a sharp outperformance post-election rally,” it said.
“With the Pakistan 2025s trading about 125bps (basis points) wider to Sri Lanka, there is room for Pakistan bonds to outperform 25-30bps (basis points) if, as we expect, the government decides to officially seek IMF support.”
Citi Research, however, said IMF seems very ready to engage with the government despite comments from US Secretary of State Mike Pompeo that US taxpayers via the IMF should not be used to bail out Chinese lenders.“… there is no significant external debt repayment to Chinese lenders in the near term, so this should not be a bone of contention in IMF negotiations,” it said. “The US sees it in its best interest that Pakistan’s economy remains stable for many geopolitical/security reasons, and IMF program could help them achieve this.”
The think tank, however, said the terms of IMF’s 22nd loan program are likely to be more effective and “more stringent”.
“We think the IMF will want to create a more effective program than in the past. … 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),” it said.
It said SBP could hike at least another 100 to 150bps (to 8.5-9 percent) as rising inflation readings prompted them to revise their inflation forecasts to 6-7 percent. “With lingering external imbalances, rupee depreciation will likely further add to risks on inflation, especially via the expectations channel,” it added.
“Both the (Prime Minister Imran) Khan-led government and the IMF would both advocate central bank independence, and the SBP already has plans to move towards flexible inflation targeting by 2020, which also would be in line with IMF’s prescriptions.”
Citi Research said if the government decides not to seek IMF’s help it is likely going to lean heavily on import controls and drastic spending cuts to curb external and fiscal imbalances.
“They (government) would also have to pursue large scale privatisation to mobilise funding if capital flows drop substantially, alongside inevitable rupee depreciation and rate hikes,” it said.
Citing observers, it added that the country’s long-standing history of resilience and its lack of track record on debt default will still attract funding, “though we think this will be at a substantially (and eventually unsustainably) higher cost”.
“We think an important factor to how Pakistan has averted defaults in its history is its pragmatic approach to seeking IMF support.”
(This news/article originally appeared in The News on September 4th, 2018)