Dwindling reserves
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.