Fitch sees deal for package 'soon' to stabilise economy, boost reserves

Pakistan will soon reach an agreement with the International Monetary Fund (IMF) on a potential bailout package worth $12 billion (Dh44 billion) that will help Islamabad support its fledgling economy, improve foreign exchange reserves and overcome a balance of payment crisis.

"Early indications suggest that Pakistani authorities requested aid of $12 billion. we maintain that Pakistan and the IMF will reach an agreement over a bailout soon, with a potential bailout size of about $12 billion," Fitch Solutions said in its latest update on Pakistan's economy.

"We believe that the conditions and targets will focus on key areas such as fiscal consolidation and debt management, a review of monetary and exchange rate policy, financial and banking sector reforms, as well as the implementation of key structural reforms," it added.

It will be the highest loan by any Pakistani government in its history from the fund.

Fitch noted that 2013 package improved Pakistan's macroeconomic fundamentals over the three year time-frame before fiscal and monetary management started to slip again in late-2016 and 2017.

"We would expect similar measures to be implemented in the event of a package being signed."

Fitch said measures to strengthen Pakistan's fiscal and debt dynamics will likely be a major cornerstone of the IMF deal, with the end-goal of narrowing the budget deficit and stabilising the debt-to-GDP ratio through austerity measures.

"These policies will likely be aimed at reducing the budget deficit from an estimated 6.6 per cent in 2018 to approximately 4-5 per cent, or even lower, over the next one-to-three years [with the budget 2018-19 (July-June) already targeting a deficit of 4.9 per cent]. This would be roughly in line with the consolidation programme implemented in 2013 that set out expectations for a reduction in the fiscal deficit by an annualised one per cent per year for three years," Fitch added.

Atik Munshi, senior partner at Crowe Horwath UAE, said Prime Minister Imran Khan's government has been striving to secure more funds and aid from friendly countries and the IMF to put back Pakistan's economy on track and improve its global reputation.

"Pakistan has been successful in securing some funding from the Gulf countries and has good hopes of getting IMF loan. Such a loan will come at stringent terms and Pakistan government would need to work hard for its servicing. A lot needs to be done on international and regional relationships."

The Imran-led government has obtained $10 billion from countries including the UAE, Saudi Arabia and China in order to help stabilise foreign exchange, meet its current account deficit and support the rupee. Due to a persistent decline in forex reserves, the rupee has depreciated approximately 30 per cent in the past year and Islamabad needs fresh funding to support the currency and forex reserves. And the biggest loan from the IMF will certainly help stabilise the rupee.

Imran met IMF managing director Christine Lagarde on the sidelines of the World Government Summit in Dubai last month to discuss the loan.

"I had a good and constructive meeting with Prime Minister Khan, during which we discussed recent economic developments and prospects for Pakistan in the context of ongoing discussions toward an IMF-supported programme. I reiterated that the IMF stands ready to support Pakistan. I also highlighted that decisive policies and a strong package of economic reforms would enable Pakistan to restore the resilience of its economy and lay the foundations for stronger and more inclusive growth," Lagarde said in a statement issued after the meeting.

Ahmed Shaikhani, senior vice-president at the Pakistan Business Council, said a $12 billion IMF loan in current circumstances is positive but in the coming months there could a challenge for repayment.

"The government has no policy in place to expand its tax net or a improve exports even after being in the power for seven months. Also, inflation will increase due to a hike in gas and electric prices due to the loan deal," said Shaikhani, who is also the head of Shaikhani Group.

He noted that the government has to come up with quick solutions and policies as the stock market and currency are under pressure.

Iqbal Dawood, president of the Pakistan Business Council, said the government has no option but to go to the IMF for the loan.

"The benefit of going to the IMF is that interest rate is low as the government... Tte government must control its costs and reduce expenditures in addition to managing funds in such a way that the government must not opt for a loan again in the future," he said.

According to Fitch Solutions, public debt currently stands at 71.4 per cent of GDP. Hence, fiscal consolidation will help to stabilise, and potentially lower, the debt load. The IMF previously targeted to lower the debt-to-GDP ratio from 63.9 per cent in 2013 to 60.5 per cent over a period of three years. However, this was not achieved and the ratio eventually rose to 67.6 per cent in 2016.

Similar to the previous loan agreement, Fitch Solutions expects the IMF will request Pakistan to strengthen tax administration, broaden the tax base and raise its tax-to-GDP ratio.

In addition, the reduction in public spending would likely involve further reductions to energy subsidies, as the target of reducing the subsidies to 0.4 per cent of GDP under the previous package was not met given that subsidies still stood around 0.9 per cent in 2016. Moreover, there will also likely be a focus on reducing transfers to provinces so as to better align federal and provincial responsibilities in expenditure.

Fitch believes that structural reforms will be another pillar of the IMF deal, similar to the reforms under the loan arrangement in 2013 and these will likely focus on the privatisation of loss-making public sector entities and measures to improve the local business scene.

- waheedabbas@khaleejtimes.com