Dwin­dling re­serves

The Pak Banker - - FRONT PAGE -

It is a mat­ter of se­ri­ous con­cern that for­eign re­serves are go­ing down and down with each pass­ing day. The lat­est data shows that af­ter a fall of $358 mil­lion in third week of Fe­bru­ary, the SBP re­serves have de­clined to a mere 2.75 months of im­ports as­sum­ing $4.5 bil­lion monthly (an­nual: $54bn) im­ports of goods. The crit­i­cal level, be­yond which fi­nanc­ing would be­come ex­tremely dif­fi­cult is 2.5 month of im­ports or SBP re­serves at $11.25 bil­lion. If the im­ports of ser­vices are added, the monthly toll of im­ports would reach $5.3 bil­lion and based on that, im­port cover is a mere 2.3 months at this point in time.

It is rel­e­vant to men­tion here that the World Bank and ADB look at goods and ser­vices im­ports both. So from their per­spec­tive, the im­port cover is al­ready down from the crit­i­cal level of 2.5 months since the start of Fe­bru­ary. That is why mul­ti­lat­eral fund agen­cies have tight­ened their hands on the re­lease of so-called of­fi­cial flows which the SBP is re­ly­ing on. In these cir­cum­stances, the gov­ern­ment is bank­ing on China to bail it out. Had China not been gen­er­ous in lend­ing to Pak­istan lately, the coun­try would al­ready have been un­der the Fund's pro­gramme. The ex­ter­nal debt form of sup­port from China was around $5 bil­lion in FY17 and it has pro­vided another $1.6-1.8 bil­lion so far this fis­cal year. Now there are re­ports of another $1-1.2 bil­lion com­mer­cial loan from China, which is in ad­di­tion to another $1 bil­lion raised from Chi­nese banks in the last three months.

Ris­ing global in­ter­est rates are pos­ing new prob­lems. Given this, the new loans would be a lit­tle more ex­pen­sive than what was pro­cured ear­lier. Sources say that higher in­dica­tive rates stopped the min­istry of fi­nance to go for another planned is­sue of Eu­robond. Rais­ing Euro bond at higher rates could have been po­lit­i­cally in­cor­rect for the gov­ern­ment as it hap­pened ear­lier in Novem­ber 2016, when the euro bond raised was at pre­mium to pre­vi­ous is­sue and Dar faced the mu­sic from an­a­lysts and econ­o­mists. Given the dif­fer­ence in LI­BOR be­tween Dec17 and to­day, the tenyear bond which was fetched at 6.875 per­cent in De­cem­ber would have cost 7.3 per­cent to­day.

Another $1 bil­lion ex­pected from China would pro­vide some breath­ing space for another month. But the fi­nanc­ing gap is get­ting wider and wider. As things stand at the mo­ment, cur­rent ac­count deficit would be $6.5 bil­lion for the re­main­ing five months of the fis­cal year (at $1.3bn per month) and that has to be fi­nanced one way or the other. The debt re­pay­ment is around $2.5 bil­lion in the pe­riod which takes the gross re­quire­ment to $9 bil­lion. Some of the debt would be rerolled and some new com­mer­cial bor­row­ing at high rates would take place. The FDI may bring home a bil­lion dol­lar see­ing the dis­mal per­for­mance in the past few months. Now with­out $2.5 bil­lion from the cap­i­tal mar­ket and $0.8 bil­lion from ADB and WB, how would the rest be fi­nanced? Surely, China can­not cover this en­tire gap.

The sit­u­a­tion is get­ting more and more dif­fi­cult. There are two op­tions. Ei­ther the gov­ern­ment signs an agree­ment with IMF or it seeks fur­ther as­sis­tance from China. Another dif­fi­culty is the com­ing elec­tion. Ev­ery­thing is fluid. The debt bur­den is in­creas­ing as well as the ser­vic­ing charges. The present state of un­cer­tainty is likely to con­tinue un­til the next gov­ern­ment as­sumes of­fice. The in­terim set-up will also have a hard time balanc­ing the sit­u­a­tion. Most ex­perts are of the opin­ion that ul­ti­mately the gov­ern­ment will have to go to IMF for a bail-out.

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