15/03/2023, 23:02 IMF: agreement in sight?

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BR RESEARCH

IMF: agreement in sight?

BR Research Published March 14, 2023

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It has been more than four weeks since the IMF staff concluded its technical
talks for the pending 9th review. Yet, the staff level agreement (SLA) is yet to
be reached. The markets are anxious because of the delay. First, the technical
talks that were earlier delayed by over three months, were supposed to start
in October 2022, were finally concluded in the second week of February 2023,
and now it is mid-March, and yet there is no SLA.

The economy has been on a kind of ventilator since then. Imports are being restricted to
manage the meager level of SBP reserves with the threat of economic default looming. One
by one, industries are shutting down or winding back operations as they cannot import
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while there is no respite from inflation which is setting all-time records.
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15/03/2023, 23:02 IMF: agreement in sight? - BR Research - Business Recorder

The question is whether the Fund believes any of the key pieces of the puzzle to be still
missing. Three elements are pending, and there is a good chance that these shall be
resolved soon, and the SLA shall happen in this week only. First, the Fund needs
verification whether the exchange rate is market based or not. The second is the cabinet
approval for the revision of power tariff, and the third and the most critical element is
verification of the financing assurances provided by the SBP from bilateral partner
countries. If pieces fall into place which is likely, the SLA shall happen as well. And then
those financing must be in SBP account before the board meeting. Earliest, it can happen
in May.

The issue with the currency is very important for the Fund. Since the imports are
restricted, fundamentally the currency is not market based. In fact, SBP is buying dollars
from the market; but the catch is in micromanagement of imports. It is very hard for the
IMF to assess the implied intervention; one gauge that talks about the market value is the
rate in the open market. The gap between the interbank and open market must be zeroed
in. And SBP must announce a clear plan to open-up imports.

On the gross financing, there is a gap of two billion dollars on the current account deficit
where the IMF is counting the backlog which the government is yet to agree with. Now,
that seems to be sorted and the total financing need is $4.5 billion including that of WB
and ADB. Of this, certain financing assurances have been sent by the SBP to the IMF and
the Fund is seeking verification. That also leads to the SLA. The amount is perhaps $2
billion for Saudi and $1 billion for the UAE. Here, some of the confirmation has not come
yet.

Moreover, the flows must be poured in before the board’s approval. This includes parts of
deferred oil facility and other rollovers. Fund wants the reserves to shore up. These flows
remain critical as do the other financing arrangements. Finger crossed.

IMF IMPORTS STAFF LEVEL AGREEMENT

PAKISTAN

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15/03/2023, 23:02 IMF: agreement in sight? - BR Research - Business Recorder

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