IMF approves US$15.6 billion loan for Ukraine

The International Monetary Fund said on Friday its executive board approved a four-year US$15.6 billion loan program for Ukraine.

The decision clears the way for an immediate disbursement of about US$2.7 billion to Kyiv, and requires Ukraine to carry out ambitious reforms, especially in the energy sector, the Fund said in a statement.

The Extended Fund Facility (EFF) loan is the first major conventional financing program approved by the IMF for a country involved in a large-scale war.

Ukraine's previous, US$5 billion long-term IMF program was canceled in March 2022 when the fund provided US$1.4 billion in emergency financing with few conditions. It provided another US$1.3 billion under a "food shock window" program last October.

Ukraine must meet certain conditions over the next two years, including steps to boost tax revenue, maintain exchange rate stability, preserve central bank independence and strengthen anti-corruption efforts.

Deeper reforms will be required in the second phase of the program to enhance stability and early post-war reconstruction, returning to pre-war fiscal and monetary policy frameworks, boosting competitiveness and addressing energy sector vulnerabilities, the IMF said.

A senior US Treasury official said the program was really solid and included commitments from Ukrainian authorities to achieve 19 structural benchmarks over the next year alone.

IMF First Deputy Managing Director Gita Gopinath said the program faced exceptionally high risks, and its success depended on the size, composition and timing of external financing to help close fiscal and external financing gaps and restore Ukraine's debt sustainability.

The decision formalizes an IMF staff-level agreement reached with Ukraine on March 21 that takes into consideration Ukraine's path to accession to the European Union after the war.

Ukrainian President Volodymyr Zelenskiy welcomed the new funding.

"It is an important help in our fight against Russian aggression," he said on Twitter. "Together we support the Ukrainian economy. And we are moving forward to victory!"

US Treasury Secretary Janet Yellen, who pushed hard for the past year to secure the IMF funding package and paid a surprise visit to Ukraine in February, said the package would help secure the country's economic and financial stability and set the foundation for long-term reconstruction.

"I call on all other official and private creditors to join this initiative to assist Ukraine as it defends itself from Russia’s unprovoked war," she said in a statement. "The United States will continue to stand by Ukraine and its people for as long as it takes."

The IMF said international financial institutions, private-sector firms, and most of Ukraine's official bilateral creditors and donors backed a two-step debt treatment process for Ukraine that includes adequate financing assurances on debt relief and concessional financing during and after the program.

The broad support reassured the IMF, the senior Treasury official said, adding, “That was really helpful for them to see that we really mean to be there for the long haul."

LONGER WAR SCENARIO

IMF official Gavin Gray told reporters the fund's baseline scenario assumed the war would wind down in mid-2024, resulting in the projected financing gap of $115 billion, which would be covered by the multilateral and bilateral donors and creditors.

The fund's "downside scenario" saw the war continuing through the end of 2025, opening a much larger $140 billion financing gap that would require donors to dig deeper, he said.

Gray said the program had been designed to function, even if economic circumstances were "considerably worse" than the baseline. He said the countries providing financing assurances had agreed to work with the IMF to ensure Ukraine was able to service its debt to the IMF if larger sums if needed.

Ukraine will face quarterly reviews beginning as early as June, he said.

 

 

  

Pakistan: Dilemma of Policy Planners

I am obliged to share with my readers one of my blogs posted as back as on July 09, 2013, its title was “Pakistan: Dilemma of Policy Planners”. It appears that the situation has not improved in nearly a decade and the country continues to suffer from the same contentious issue and apathy of the ruling junta.

With every passing day the conviction seems to be getting stronger that PML-N government headed by Mian Nawaz Sharif hardly has any sense of priority. Many of its announced plans lack coherence and at the best can be termed wishful thinking and worst of all complacency is based on perceptions rather than ground realities.

The country is suffering from severe balance of payment crisis, which demands following multi pronged strategy, negotiations with International Monetary Fund (IMF) being the top priority. It seems the government has hardly done any homework prior to commencing negotiations with the lender of last resort.

Those at the helm of affairs suffer from the illusion that the United States needs Pakistan rather than realizing the harsh reality that India is being promoted as regional super power and also being assigned an important role in Afghanistan after the pullout of US-led Nato forces.

The entire focus of Senator Ishaq Dar seems to be on mobilizing additional taxes and withdrawing subsidies.  PML-N government has been talking about resolution of circular debt issue by borrowing more but completely ignoring the urgent need to overcome the two most contentious issues: rampant pilferage and poor recovery. Injection of billion of rupees may reduce the debt for the time being but it will reappear soon.

Some of the analysts are of the view that Mian Sahib is surrounded by people having vested interest, seeking funds on concessional terms for establishing power generation facilities. These analysts also believe that another ‘power scam’ is in the making.

To substantiate their argument they say that the country has installed capacity of over 28,000MW but actual utilization hovers at less than half. Therefore, the top priority should be running of power powers at optimum capacity utilization rather than adding new capacities.

Some of the cynics say that Since Dar is an accountant by profession his entire focus is on profit and loss statement and balance sheet rather than achieving synergy, economy of scale and off course there is no focus on restoring confidence of investors.

At present Pakistan is suffering from ‘confidence deficit’ which is even worse than budget deficit and trade deficit put together. Local investors are shy because of looming energy crisis and deteriorating law and order situation.

Mobilizing additional tax without putting the economy on track is ‘hoping against hopes’. Since bulk of Pakistan’s revenue collection comes from indirect taxes, people must have ample purchasing power. Bleak outlook for the economy, eroding purchasing power and shrinking job opportunities forces people not to spend. On top of all failure of the government to contain price hike adds to the woes of masses.

There is an old saying ‘action talks louder than words’ but in case of PML-N there is hardly any action but big talk, mostly blame game. Both Pervez Musharraf and Asif Ali Zardari are being held responsible for the poor state of economy.

People listened to this during the election campaign but now want action to remove some of the malice. PML-N had sought 100 days to put the economy on track but its real challenge will be getting the budget endorsed by the IMF to enter into an agreement with the Fund.

Ironically most of the members of National Assembly can’t comprehend impact of budget proposals and impact of these on masses. They consider clapping their sole duty during the speeches of Prime Minister and Finance Minister and saying ‘I second’ their sole responsibility. In return members are given huge development funds which are mostly spent on development of their home town rather than those areas which need the funds most.

Though, it was expected that collectively ANP, MQM, PPP and PTI will emerge as strong combined opposition, not much has been delivered as yet. Many analysts fear that the present opposition will also be the ‘friendly opposition’ only. Since some of the leading parties have formed government at province, these are effectively part of ruling junta and not the opposition.

 

Sri Lanka to receive first tranche of IMF bailout funds in two days

Sri Lanka will get the first $330 million tranche of the International Monetary Fund's bailout in the next two days, the global lender said on Tuesday, putting the onus on the cash-strapped nation to rein in its debt to sustainable levels.

Economic mismanagement coupled with the impact of the COVID-19 pandemic left Sri Lanka severely short of dollars for essential imports at the start of last year, tipping the island nation into its worst financial crisis in seven decades.

The IMF's Executive Board on Monday approved a nearly US$3 billion bailout for Sri Lanka with the endorsement expected to catalyze additional external support for the country to the tune of US$3.75 billion from the likes of the World Bank, the Asian Development Bank and other lenders.

The office of the country's president, Ranil Wickremesinghe, said the program will enable it to access up to US$7 billion in overall funding.

"Sri Lanka is no longer deemed bankrupt by the world," Wickremesinghe said in a video statement released by his office. "The loan facility serves as an assurance from the international community that Sri Lanka has the capacity to restructure its debt and resume normal transactions."

The IMF funding will, however, not immediately help millions of Sri Lankans, who are being squeezed by soaring costs of living, high income taxes of up to 36% and a 66% increase in power tariffs. The economy is expected to shrink by 3% this year after contracting 7.8% in 2022.

Half of the families in Sri Lanka have been forced to reduce the portions they feed their children, according to a survey by Save the Children released this month.

Shehan Semasinghe, Sri Lanka's state minister of finance, said the IMF bailout was absolutely essential for the country.

"But now we have to patiently focus on very difficult reforms going ahead. We have to continue to work together to rebuild Sri Lanka's economy and move it towards recovery," he said in a statement late on Monday.

The Colombo Stock Exchange All-Share index was down 0.6% as of 0629 GMT, while the Sri Lankan rupee strengthened 6.45% against the dollar.

Bonds were up by 0.73 cents to 1.50 cents across tenors, with the March 2029 bond leading the gains.

Peter Breuer, Senior Mission Chief for Sri Lanka, Asia and Pacific Department at IMF, said debt sustainability was one of the key criteria for the IMF to approve a bailout for any economy.

Going forward, Sri Lanka's disbursements from the bailout package would be tied to reviews that take place every six months, Breuer said, adding that the IMF has not set any growth target but has put in place an inflation band of 12-18% for the country to achieve by end of 2023.

Sri Lanka's retail prices have eased from last year's peaks but still hover over 50%.

Securing financing assurances from China and India and all its major bilateral creditors was key to Sri Lanka's efforts of unlocking the IMF bailout and putting its economy back on track.

The island nation aims to announce a debt-restructuring strategy in April and step up talks with commercial creditors ahead of an IMF review of the bailout package in six months, its central bank governor told Reuters earlier this month.

"We need to keep in mind that it's still going to be a difficult road no matter how much potential funds or support is being thrown at Sri Lanka," Katrina Ell, senior economist at Moody's Analytics, told Reuters.

"Ultimately, it comes down to them being able to successfully address some of the systemic problems in terms of economic management, fiscal management."

 

 

 

 

Pakistan: IMF assistance too near yet too far

There are no known reasons about what is causing delay in IMF Staff Level Agreement. According to media reports the Fund seeks assurances from the friendly countries for funding gap. It seems the program is near from the Government side but still too far from the IMF side.

In a week mired with political uncertainty, the movement at Pakistan Stock Exchange remained jittery. Furthermore, the IMF has set forth another condition regarding written assurances from friendly countries to fund balance of payment gap before the Staff Level Agreement (SLA). The ICBC has given assurance that it will provide another refinanced US$500 million loan in few days bringing total commercial loans refinanced up to US$1.7 billion.

Pakistan’s foreign exchange reserves inched by US$18 million to US$4.3 billion as on March 10, 2023, culminating to an import cover of less than a month.

The benchmark index closed the week at 41,330 points, down 1.11%WoW. Participation in the market increased, with daily volumes averaging 223.02 million shares during the week, from 209.24 million shares in the prior week depicting a gain of 6.6%WoW.

Other major news flows during the week included: 1) Saudi Arabia extended US$1.2 billion deferred oil payment facility till February next year, 2) GoP raised PKR26 billion through PIBs auction, 3) July-January LSM output declined 4.40%YoY, 4) Bank deposits were up 15%YoY to Rs22.9 trillion in February, 5) workers’ remittances for February post 5%MoM growth and 6) GoP announced plan to borrow PKR7 trillion from banks in three months.

Top performing sectors were: Woolen, Glass and Ceramics, and Sugar & Allied industries, while the least favorite sectors included: Miscellaneous, Close- End Mutual Fund, and Synthetic and Rayon.

Stock-wise, top performers were: YOUW, TGL, CEPB, DGKC, and BNWM, while laggards included: PSEL, NESTLE, FHAM, BAHL, and RMPL.

Flow wise, individuals were the major buyers with net buy of US$4.23 million, followed by Banks/DFI with net buy of US$1.06 million), while Insurance companies were major sellers during the week, with a net sell of US$2.08 million.

Any further development on the IMF front is likely to set the direction of the market. The recorded high inflation of 31.5%YoY in February 2023 is expected to remain a thorn in the country’s side, driven by hikes in tariffs along with Rupee devaluation. This may lead the market to another hike in upcoming Monetary Policy accouchement scheduled for April 04, 2023.

Moreover, the local currency has continued to slide against the US dollar with no certainty regarding its limit. With this backdrop, analysts continue to advocate scrips that have dollar-denominated revenue streams to hedge against the currency risk, which include the Technology and E&P sectors.

 

 

 

Pakistan Stock Exchange average daily trading volume increases 16%WoW

The benchmark index of Pakistan Stock Exchange closed the week on March 03, 2023 at 41,337 points, depicting an increase of 1.55% over the course of the week. Participation in the market improved, with daily volumes averaging 159.76 million shares during the week, as compared to 137.89 million shares in the prior week depicting a gain of 15.9%WoW.

The local currency depreciated heavily against the US$ which lead to a negative sentiment in the market midweek. However, a positive market reaction was seen where the State Bank of Pakistan (SBP) hiked the policy rate by 300bps to 20% to fulfill the prior condition of IMF for the long awaited staff level agreement to avert sovereign default and secure the US$1.2 billion disbursement.

Foreign exchange reserves held by SBP inched up by US$556 million to US$3.81 billion as on February 24, with the import cover still remaining below a month.

Other major news flows during the week included: 1) Moody's downgrades Pakistan's rating to Caa3; changes outlook to stable from negative, 2) February 2023 CPI jumps to 31.5%, highest rate in nearly 50 years, 3) US$700 million Chinese loan lands in SBP account, 4) 8MFY23 trade deficit narrows 33.18%YoY, 5) RKR2 billion shortfall in February 2023 tax collection and 6) Money supply reaches to PKR30.68 trillion in 7MFY23.

Top performing sectors were: Miscellaneous, Commercial banks, and Woolen, while the least favorite sectors were: Tobacco, Leather and Tanneries, and Property.

Stock-wise, top performers were: PSEL, UBL, BAFL, EPCL, and MEBL, while laggards were: PGLC, SML, PAKT, SRVI, and JVDC.

Flow wise, insurance companies were the major buyers with net buy of US$10.42 million, followed by companies with net buy of US$8.15 million, while foreign investors were major sellers during the week, with a net sell of US$9.48 million.

All eyes on the Staff Level Agreement, Pakistan is in a very critical situation where delays in the 9th Review can’t be tolerated. Any news flow regarding foreign inflows, whether from the IMF or other bi-lateral and multilateral sources, would support the market.

The market may remain jittery in the near future due to higher inflation expected to be driven by hikes in gas tariff and the GST implementation starting to materialize.

The PKR continues its slide against the Greenback and as the open market rate inches upwards there is no clarity as to its limit.

With this backdrop, we continue to advocate scrips that have dollar-denominated revenue streams to hedge against the currency risk, which include the Technology and E&P sectors.

 

Pakistan: Monetary Policy or Mockery

State Bank of Pakistan (SBP) was scheduled to announce Monetary Policy on March 16, 2023. However, on February 28, the central bank announced to hold meeting of Monetary Policy Committee on March 02. The central bank is likely to hike the interest rate by 200 to 300 bps.

While this may have surprised some people, many say it was much anticipated. They say since SBP and Finance Ministry plan to hold a big auction on March 08, 2023. The Banks faced a few challenges, worst being lack of clarity on the interest rate.

It was feared that if the Monetary Policy is not announced before the auction, the banks will participate at much higher than the previous cutoff levels.

If the Banks participate at or around the previous cutoff levels and the SBP raises interest rates higher than the market expectations of 200bps, the carry on the T-bills will be negative as SBP will have to hold OMO at higher levels.

It appears that the Government of Pakistan is adamant at rising interest to curb inflation as per IMF mantra. However, it is necessary to say that after the proposed hike the paying interest rate for the GoP on its borrowing would become unsustainable, inflation would spike to new highs and businesses would witness further erosion in their competitiveness – leading to further fall in exports.

It is also necessary to reiterate that the steps being taken on the behest of IMF would take Pakistan closer to default. One wonders, why the present economic managers have not been able to come up with their homegrown plan to pull Pakistan out of the current malice.

Failure on the part of economic managers to tax the rich, as advised by the chief of IMF, suggests that the rulers wish to prolong their ‘honeymoon’ and let the Pakistanis face all the adversaries.

 

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Pakistan Stock Exchange witnesses 10.4%WoW decline in average daily trading volume

During the week ended on February 24, 2023, Pakistan Stock Exchange remained volatile due to news flows regarding the IMF deal and approval of Financial Supplementary Bill for raising additional taxes of PKR170 billion.

Unease amongst the participants increased as T-Bills cut-offs in the latest auction by State Bank of Pakistan (SBP) went up to 19.95%, contributing to the fears of further hike in the interest rate.

Reserves held by the SBP witnessed an increase for second consecutive week, rising to US$$3.26 billion, still standing at a critical level. The noticeable improvement can be expected after IMF agreement and expected inflows from bi-lateral partners.

The KSE-100 index closed the week at 40,708 points, lower by 411 points, depicting 1.0%WoW decline.

Participation in the market declined by 10.4%WoW, with daily volumes averaging 138 million shares as against 154 million shares a week ago.

PKR continued to strengthen against the US$, gaining 2.82% over the course of the period to close in at PKR259.99/US$ on Friday.

Other major news flows during the week included: 1) foreign exchange reserves got much-needed boost on support from amid IMF procrastination, 2) GoP announced steps to correct fiscal imbalances, 3) Current Account for the first seven month of the current financial year dipped on import curbs to US$3.8 billion deficit, 4) Islamabad got positive signals for help from Riyadh, and Beijing, and 5) ECP failed in taking decision on election date.

Sector-wise, Miscellaneous, Cement and Vanaspati & Allied Industries were amongst the top performers. On the other hand, Leasing Companies, Close-End Mutual Fund and Oil & Gas Exploration Companies were amongst the worst performers.

Flow wise, major net selling was recorded by Individuals with a net sell of US$4.56 million. Companies absorbed most of the selling with a net buy of US$5.91 million.

Top performing scrips during the week were: PSEL, KTML, KOHC, and MUGHAL, while top laggards were: PGLC, HGFA, PPL, SHFA, and SHEL.

The market is expected to remain range-bound in the near future, clouded by concerns regarding the interest rate hike. Expected increase in the interest rate may be a huge downside for the aggregate demand and subsequently the equity markets.

Any news regarding a successful Staff Level Agreement with the IMF and inflows from bi-lateral partners would boost investor’s confidence. Investors are advised to stay cautious while building new positions in the market.

Pakistan: Imposition of additional taxes may lure IMF, but plunge the country deeper in debt trap

After reading the details of mini budget, it may be said that the incumbent government may have succeeded in convincing the International Monetary Fund (IMF) to release a paltry amount. However, the measures would further weaken the already feeble economy. On top of all the fear of default will continue to haunt.

Finance Minister, Ishaq Dar presented the proposal to both the houses to impose additional taxation measures of PKR170 billion. These measures address only one deficit, budget deficit. No measures have been introduced to bridge the current account deficit or improve debt payment capacity of the country.

The release of around US$ one billion by the IMF may pave the way for seeking loans from other lenders, but in no way help in generating additional dollars to boost the foreign exchange reserves of Pakistan.

While the imports are likely to become more expensive, especially after the depreciation of Pak rupee, no measures have been introduced to enhance competitiveness of the Pakistani exporters.

Hike in interest rate, electricity and gas tariffs, sales tax and Federal Excise Duty will collectively increase prices of goods for the consumers and fuel inflation.

In aggregate cost of doing business will be increased and local manufacturers will witness erosion in competitiveness in the global markets.

 

Pakistan: Prior action needed to reach Staff Level Agreement

After recent visit by IMF delegation to Pakistan, the much awaited Staff Level Agreement (SLA) with the visiting IMF team was not executed.

The IMF statement was encouraging as it stated that virtual discussions will continue and hinted towards certain prior actions. The statement also said considerable progress was made during the mission on policy measures to address domestic and external imbalances.

These developments came after a long 9-day visit that was unusually longer than past IMF review team interactions. As a precursor to the visit, the government of Pakistan had let go of the dollar peg late last month where the Pak Rupee devalued by around 14% since Jan 26, 2023 till date.

The Finance Minister in a press conference early Friday morning indicated that Rs170 billion of additional taxes will now be imposed. Circular debt accumulation will also need to be stopped and the finance minister hinted towards energy sector reforms.

As per news reports, the government has decided to implement tax and non-tax measures as demanded by IMF as a prior action through a Presidential Ordinance.

Even though the exact timeline of events may move, it is believed that the SLA will be signed in next couple of weeks or so. In a month's time after that, the IMF Board approval will likely come though paving the way for the disbursement of the US$1 billion tranche by next month. This will be followed by disbursements from World Bank, ADB and friendly nations.

Funding from friendly countries is very critical this time around for the resumption of the IMF program, and could be one of the IMF demand. Disbursement from Saudi Arabia, UAE, Qatar and China may be to the tune of US$5 billion (other than already committed or expected rollovers).

The IMF may also seek assurances of exact amounts of funding from these countries before its Board approval.

The time period from now to the disbursement of the IMF tranche could pose risks in terms of shortages of goods in the country as the country’s focus will be ensure debt repayments and maintain only critical imports. There is already hint of petrol rationing in some parts of the country coupled with selected capital controls and slow processing of non essential imports.

It will be interesting to evaluate the Pakistan Country Report issued by IMF after the IMF board approval. Especially condition related to reach foreign exchange reserves of US$16 billion by June 2023 as per the news reports.

There is also a need to see IMF condition on Pakistan L/Cs payment. According to news reports, IMF has insisted on immediate removal of restrictions on imports for which US$4 billion will be needed to open L/Cs.

 

Russia: Outlook painted by IMF looks too rosy

The International Monetary Fund delivered some uplifting economic news to Vladimir Putin. The Russian president should now make the case to his own government, which doesn’t share the IMF’s optimism.

The international body recently estimated that Russia will avoid a recession in 2023 and expand at 0.3% after shrinking by 2.2% in 2022 that amounts to a quasi-stagnation, but still looks too positive.

At first glance, the Fund’s latest forecast is a reason for hope for an economy battered by the cost of its invasion of Ukraine and associated sanctions. Even though the global economic prospects do not look as dire as they did a few months ago, the Russian revision is significant. In October 2022, the IMF was seeing the country’s GDP contracting by 2.3% in 2023.

The IMF hasn’t detailed the assumptions underpinning its upbeat Russian outlook. Russian economists, polled this month by the country’s central bank, are still expecting GDP to fall by 1.5% this year.

The economy ministry still predicts that output will contract by 0.8%, according to Russian independent publication The Bell.

The key to the IMF’s optimism may be its assumptions about oil prices and the effect of the recent bans and price caps by the European Union and the G7 group of industrialized countries. The measures will not significantly affect Russia’s oil exports, the Fund says.

That is a matter of intense debate among economists since oil prices remain below the cap set by the G7.

Much will depend on the evolution of oil prices this year. Oil and gas exports amounted to about 15% of Russia’s GDP in 2021, and related taxes finance more than 40% of the government’s budget.

Urals , the Russian crude, trades at around $56 a barrel. The discount to benchmark Brent is now at 33%, against 7% before the war. That is a sign that sanctions have had some impact. It also throws further doubt on the IMF’s optimism.

In October 022, Russian central bank predicted that the domestic economy would contract by between 1.5% and 4% this year. That assumed a US$70 a barrel price for Urals – the same number the government used for its budgetary planning.

Four months later, the world economy has brighter prospects and Russia may be more resilient than expected. But only a serious oil price rally, improbable in the context of the global economy’s subpar growth - to quote the IMF - could justify looking at Russia through rosy glasses.

 

People of Pakistan need replies from the incumbent government and the IMF

After having read the details of foreign exchange reserves held by Pakistan a few questions come to my mind, I am sure my readers also have similar questions. Let me enumerate some:

1. Is the present economic team competent enough to occupy these officers? If they could not resolve top of the agenda item, negotiations with IMF, in all the honesty allowing these incompetent people in strategically important office tantamount to ruining the country.

2. The Prime Minister as well as the Finance Minister is putting the blame of hike in electricity and gas tariffs, withdrawal of subsidies, collection of petroleum levy on IMF, will they be kind enough to let the nation know the proposals they had sent to the IMF?

3. Why the IMF is not demanding cut in the extravaganzas of the incumbent government?

4. IMF has endorsed all the hikes, despite knowing that Pakistan will plunge deeper into the debt. My question to the lender of last resort is, have you come up with a bailout program for Pakistan or want to keep the present rulers in power and let the country meet eminent default?

Is IMF responsible for all the miseries being faced by Pakistan?

I am amused as well as dismayed after reading statement of Shehbaz Sharif regarding ongoing Pakistan-IMF negotiations.  He was quoted by Dawn saying, IMF was giving a very tough time to Finance Minister Ishaq Dar and his team.

It will not be wrong to say that not only the ruling elites fail to pay attention to what the IMF is saying, but also fail to understand the gravity of the situation.

At times, the utterings of the members of incumbent government tantamount to maligning IMF for being responsible for all the miseries being faced by Pakistan.

The general perception being created by the ruling junta that IMF is giving tough time to Pakistan is totally incorrect. To be honest, the negotiating team has failed in coming up with its ‘home grown plan’ to overcome the present malice.

As a result, IMF has shared its plan, to which the incumbent is more than willing, so that it could put all the blame for Pakistan’s the miseries on the IMF.

I have often said that overcoming current account deficit and budget deficit is far easier than overcoming the trust deficit being faced by the present government of Pakistan.

It seems that the present government is in a hurry to get the IMF tranche released so that it could continue its extravaganzas.

It is being feared that the present government is consenting to all the IMF conditions without having the slightest realization that debt servicing will not be possible for the next government.

 

Bangladesh: IMF Approves US$4.7 Billion Assistance

The International Monetary Fund’s US$4.7 billion loan program won’t be a miracle worker for the Bangladesh economy. The program would hold the economy back from falling off the cliff from the whiplash of the pandemic and the Ukraine war and turn it towards the right track.

“The authorities made the right decision to come to the Fund — and most importantly, to come to the Fund early,” said Rahul Anand, the IMF’s mission chief to Bangladesh.

Turning to the IMF when the country is already in crisis could make the adjustments particularly hard on people — a situation confronting Pakistan and Sri Lanka. But Bangladesh is not in crisis, Anand said.

“Just like countries around the world, Bangladesh is dealing with the impact of global shocks — first from the pandemic and then from the ongoing war in Ukraine,” he added.

In that vein, the program’s immediate task is to prop up the country’s shrinking foreign exchange reserves, which has already hit businesses and ordinary people hard.

While the IMF would make US$476 million immediately available, the lender’s impact would be beyond that: it would give the other multilateral agencies, such as the World Bank, to make more funds available for Bangladesh.

This along with the import curbs placed by the government will shore up the gross foreign reserves to US$30 billion by the end of the fiscal year, according to the IMF’s projections.

As per the lender’s balance of payments and investment position manual (BPM6), gross foreign reserves calculation does not include the various funds that the Bangladesh Bank has formed from the reserves as well as the loan guarantees provided for Biman, the currency swap with Sri Lanka, the loan to Payra Port Authority and the below-investment-grade securities. These account for about US$7.5 billion.

When these components are taken out, the IMF projection matches the government’s expected foreign currency reserve position at the end of fiscal 2022-23: US$37.7 billion.

Gross reserves would increase to US$34.2 billion in fiscal 2023-24 and to US$40 billion in the following year, as per IMF’s projections. It would hit US$46.4 billion once the program ends.

Other than restoring macroeconomic stability by way of the reserves, the program would also give impetus to some long-due structural reforms such as raising more tax revenues, scaling up social spending, modernizing the monetary policy framework, strengthening the financial sector and building climate resilience.

“While confronting challenges resulting from the global headwinds, the authorities need to accelerate their ambitious reform agenda to achieve a more resilient, inclusive and sustainable growth,” said Antoinette Monsio Sayeh, the deputy managing director of IMF, in a press release.

Thanks to the reforms ushered in by the program, Bangladesh’s tax revenue would increase from 7.8% of GDP this fiscal year to 8.3% next year and then 8.8%. At the end of the program, it would be 9.4% of GDP, as per the IMF’s projections.

The program would insist on cutting back on subsidies, which would free up more resources for social and development spending.

“Not all subsidies are helping the poor and vulnerable. In Bangladesh where gas and electricity are being subsidized, the rich drive more cars and use more air conditioning,” Anand said.

Rationalization of untargeted subsidies will free fiscal resources to strengthen social safety nets and increase development spending.

Substantial investment in human capital and infrastructure will be needed to achieve Bangladesh’s aspiration to reach upper-middle income status by 2031 and meet the Sustainable Development Goals.

By the end of the program, the size of the annual development program would increase from the existing 5.2% of GDP to 6.5%, as per the IMF’s projections.

Public investment would increase from 8.8% of GDP this fiscal year to 11.2% of GDP in fiscal 2025-26, when the program ends. Subsequently, Bangladesh’s real GDP growth would be back to 7% by fiscal 2024-25.

This fiscal year, the growth would be 5.5%, as the IMF’s projections, which is in line with other multilateral lenders’ forecasts.

Earlier last month, the WB pared back Bangladesh’s growth forecast for this fiscal year by 1.5% to 5.2%. In December last year, the government revised down the growth forecast from 7.2% to 6.5%.

The IMF will disclose the specifics of the loan program in the coming days.

The mandatory conditions would be a minimum level of net international reserves and domestic revenue collection and a ceiling on the government’s budget deficit, The Daily Star has learnt from people involved in the negotiations with the IMF staff mission to thrash out the terms for the loan.

Implementing the income tax law, setting up an asset management company to dispose of soured loans, bringing down the banking sector’s default loans to within 10% and raising the capital adequacy ratio to the BASEL 3 requirement of 12.5%, are among the reforms agreed upon.

Periodically adjusting the fuel price through a formula and increasing remittance receipts through formal channels are also on the task list.

A social spending floor and better targeted social safety net programs, market-based exchange rate interest rate, developing the capital and bond market, expanding and diversifying exports and modernizing the monetary policy framework and reporting on net foreign reserves are the other agreed reforms.

The interest rate on the loan would be about 2.2%. Of the US$4.7 billion, US$1.4 billion can be repaid over a 20-year horizon with a grace period of ten years. The remaining amount must be paid back within ten years; the grace period for a portion of the sum is 3.5 years and for another portion 5.5 years.

 

Pakistan Needs Effective Debt Restructuring

Pakistan’s leading brokerage house, Topline Securities, in its report titled “Pakistan’s Debt Restructuring - External Debt Repayment Crisis” dated December 03, 2022, had highlighted Pakistan’s external debt repayment obligations of US$24 billion annually and the need to address these in a sustainable way. The brokerage house opined these external debt repayments are too high and should ideally be rescheduled and reduced to sustainable levels.

The brokerage house further highlighted that current foreign exchange crisis was mainly driven by external debt obligations and not trade unlike Pakistan’s previous foreign exchange crisis of 2008. Therefore, despite ongoing import controls, Pakistan’s foreign exchange reserves continue to dwindle to 9-year low at US$4.6 billion only as debt repayments continue to come due and are serviced.

Falling foreign exchange reserves, delay in IMF review and slow policy actions are adding to Pakistan’s distress. Resultantly, despite of more than US$10 billion pledges, Pak Rupee (PKR) black market premium is continuously rising and has increased from 10% a few weeks back to 15% now when compared to the official interbank rate.

The brokerage house highlights that the true culprit of the current debt conundrum is short term rollovers that have increased by 9 times to over US$12 billion since 2015. It is of the view that external debt restructuring is an eventuality, and the mode of restructuring, that is orderly or disorderly, will test Pakistan’s economic vulnerabilities.

The brokerage house believes that Pakistan should ideally try to convert its short term external loans with long term with the help of friendly countries like China, Saudi Arabia, United Arab Emirates etc, if that is not doable than Pakistan should try G-20 common framework of debt restructuring. These are less painful and will help recovery soon without affecting credit ratings. 

If the Government of Pakistan does not opt for orderly and amicable restructuring and continues to rely on short term funding from friendly nations or relief in the form of low cost loan vis-a-vis for floods to manage the country’s external accounts, the country could move towards a disorderly and coercive restructuring that will be very painful and may trigger a further credit rating downgrade.

After brokerage house’s earlier report, many other experts, trade bodies and polls suggest that Debt Restructuring is the most viable solution that can help reduce debt burden and will lead to relatively faster economic recovery.

The Monetary Policy Announcement of January 23, 2023 underscores the need for debt restructuring as US$8 billion of debt still needs to be dealt with in next 5 months till June 2023 while the country’s reserves are half of that. Even if the bulk of this amount is rolled over as the SBP is alluding to, the meter will again reset on July 1 when the rollovers will restart for FY24.

A few countries including Angola, Greece, Argentina, Ghana, Sri Lanka and Zambia among others have gone through debt restructurings. Based on their experience, the brokerage house found that orderly and timely debt rescheduling is relatively less painful and provide better chances of quicker economic recovery.

 

Sri Lanka: China offers debt moratorium

The Export-Import Bank of China has offered Sri Lanka a two-year moratorium on its debt and said it will support the country's efforts to secure a US$2.9 billion loan from the International Monetary Fund (IMF), according to a Reuters report.

India wrote to the IMF earlier this month, saying it would commit to supporting Sri Lanka with financing and debt relief, but the island nation also needs the backing of China in order to reach a final agreement with the global lender.

China's January 19, 2023 letter sent to the finance ministry may not be enough for Sri Lanka to immediately gain the IMF's approval for the critical loan, a Sri Lankan source with knowledge of the matter said.

Regional rivals China and India are the biggest bilateral lenders to Sri Lanka, a country of 22 million people that is facing its worst economic crisis in seven decades.

According to the letter, the Export-Import Bank of China said it was going to provide an extension on the debt service due in 2022 and 2023 as an immediate contingency measure based on Sri Lanka's request.

At the end of 2020, China EXIM bank had loaned Sri Lanka US$2.83 billion which is 3.5% of the island's debt, according to an IMF report released in March 2022.

"...you will not have to repay the principal and interest due of the bank's loans during the above-mentioned period," the letter said.

"Meanwhile, we would like to expedite the negotiation process with your side regarding medium and long-term debt treatment in this window period."

Sri Lanka owed Chinese lenders US$7.4 billion, or nearly a fifth of its public external debt, by the end of last year, calculations by the China Africa Research Initiative showed.

"The bank will support Sri Lanka in your application for the IMF Extended Fund Facility (EFF) to help relieve the liquidity strain," the letter said.

The Sri Lankan source, who asked not to be identified because of the sensitivity of the confidential discussions, said the island nation had hoped for a clear assurance from Beijing on the lines of what India provided to the IMF.

"China was expected to do more," the source said, "This is much less than what is required and expected of them."

Sri Lanka's central bank chief P. Nandalal Weerasinghe said on Tuesday that the country hoped for assurances from China and Japan, another major bilateral lender, soon and complete debt restructuring in six months.

 

Oil slides after IMF warns of tougher 2023

Oil prices slid on Tuesday from their highest levels in a month on a stronger US$ and after the head of the International Monetary Fund warned of a tougher 2023 as major economies experience weakening activity.

Brent crude futures dropped to US$84.93/barrel by 0148 GMT while US West Texas Intermediate crude (WTI) traded at US$79.49/barrel, after the US$ strengthened. A stronger greenback makes dollar-denominated commodities more expensive for holders of other currencies.

IMF Managing Director Kristalina Georgieva said on Sunday that the United States, Europe and China - the main engines of global growth - are all slowing down simultaneously, making 2023 tougher than 2022 for the global economy.

Still, oil prices settled more than 2% higher on Friday with Brent and WTI closing 2022 up 10.5% and 6.7%, respectively.

Commodities saw a substantial US$12.3 billion bullish flow in the week that ended on December 27, 2022 the single largest weekly bullish flow in 2022, Societe Generale analysts said in a January 03. 2023 note.

“The commodity with the largest flow was Brent, which saw a US$3.4 billion bullish flow as Russia outlined its response to the EU and G7 imposed price cap on the country's crude exports to third parties," the analysts said.

President Vladimir Putin banned the supply of crude and oil products from February 01, 2023 for five months to nations that abide by the cap in a decree, which also included a clause that allows for Putin to overrule the ban in special cases.

Russian crude has been diverted to India and China from Europe while Moscow planned to increase diesel exports from the Baltic Sea port of Primorsk to 1.81 million tons in January 2023. However, January oil products exports from Tuapse are expected to fall to 1.333 million tons, traders said.

A Reuters oil price poll showed that Brent prices are expected to average at US$89.37/barrel in 2023 while the average for WTI is at US$84.84 a barrel as global economic growth slows.

In China, the world's largest crude importer and second-largest oil consumer, some people in key cities braved the cold and a rise in COVID-19 infections to return to regular activity on Monday, raising the prospect of a boost to the economy and oil demand as more recover from infection.

 

Iran: IMF sees a positive outlook in 2023

Drawing a positive outlook for the Iranian economy in 2023, the International Monetary Fund (IMF) has predicted that 10 major indicators of the Iranian economy would experience growth and improvement in the forthcoming year as compared to 2022.

IMF has announced that Iran's foreign currency reserves are more than US$120 billion, but it claims that Iran has access to only a small part of these reserves due to the US sanctions.

According to the IMF data, Iran's Gross Domestic Product (GDP) based on the purchasing power index will grow by US$91 billion or two percent in 2023 to reach US$1.7 trillion.

Meanwhile, Iran's GDP per capita is also expected to increase by US$865 based on the purchasing power index to reach US$19,528 in 2023 from US$18,663 in 2022.

IMF sees Iran's GDP excluding oil grow by 2% in 2023, and the growth of the country’s economy including oil will be 2.1% this year.

The inflation rate in Iran is predicted to be 40% in 2023, registering no change as compared to 2022.

The International Monetary Fund expects the rate of the country’s liquidity growth to slow down in 2023. The liquidity growth that reached 47.5% of GDP in 2022 will decrease to 45.6% in 2023.

The budget deficit of the Iranian government in 2023 will reach 6% of GDP, which is 1.8% higher than the figure for 2022.

The Iranian government’s total revenues will not change in 2023 as compared to the previous year. The Iranian government’s income in 2023 is estimated to be 8.3% of the GDP, registering no change compared to the previous year. However, the government's non-oil incomes will increase from 7.4% of GDP in 2022 to 7.5% of GDP in 2023.

Based on the IMF data, the downward trend of the Iranian government's gross debt will continue in 2023 to settle at 31.9% of the GDP this year.

The fund also predicts Iran's current account balance to be US$30.2 billion in 2023. Iran's current account balance in 2022 is estimated at more than US$32 billion.

Based on the referred data, Iran's foreign currency reserves increase by more than US$11.4 billion in 2023 and reach US$42.2 billion. Iran's available foreign currency reserves in 2022 are estimated at US$30.8 billion.

According to the estimate of the International Monetary Fund, Iran's foreign debt in 2022 will be equal to 0.5% of the GDP and it is expected that this figure will remain the same in 2023.

 

Pakistan Stock Exchange witnesses lackluster movement

The week ended on December 16, 2022 witnessed a range-bound movement of the benchmark index. The highlight of the week was Thursday when the market took a hit and the index posted 1.0%WoW decline to close at 41,301 points.

Economic uncertainty caused by enhanced delays in the 9th Review of the IMF program, along with rising interest rate led to a lackluster sentiment in the market. Further exasperating the sentiment is the critical level of the country’s foreign exchange reserves, having dropped to USD12.6 billion. Average daily trading volume decreased further by 9.9%WoW, down to 180 million shares.

Major news flows during the week were: 1) five financing pacts worth US$775 million inked with ADB, 2) IMF wants to observe 3 more quarters, examine flood rehab plan, 3) Saudi Arabia may increase the amount of oil supply to Pakistan on deferred payments to US$2.4 billion a year, 4) Reko Riq project got green signal with definitive agreement signed, 5) Jul-Nov workers’ remittances decline 9.8%YoY, 6) Fed raised rates by half percentage point, sees economy nearing stall, and lastly 7) Jul-Oct LSM sector output down 2.89%YoY.

The top performing sectors were: Miscellaneous, Tobacco, REIT, Textile Composite, and Vanaspati & Allied, while the least favorite sectors were: Leasing companies, Automobile Parts, Close-end Mutual Funds, Refineries, and Jute.

Stock-wise, top performers were: PSEL, PAKT, SYS, ENGRO, and DCR, while laggards included: PGCL, LOTCHEM, TGL, THALL, and MTL.

Flow-wise, Foreigners topped the net sellers, offloading US$9.6 million followed by Mutual funds (US$7.1 million), Individuals (US$2.5 million), Insurance Companies (US$1.4 million) and NBFC (US$0.1 million). While Banks, Companies, Other organizations and Brokers were on the buying side, with a net buy of US$12.8 million, US$6.2 million, US$1.5 million, and US$0.2 million respectively.

With the rising policy rate amid political uncertainty, the market remains in a state of indecisiveness. Incoming news regarding delays in IMF was bound to invoke some gloom; the longer is the delay the more the uncertainty is going to influence the market, keeping volumes away.

The local currency has started paring some of the gains it had made recently, depreciating to PKR225/USD as the foreign exchange slips to critical levels despite restrictions on the opening of L/Cs.

With the winters approaching, inflation is expected to remain persistent. The market participants expect another cumulative rate hike of 200 bps in FY23.

Ghana to buy oil with gold instead of US dollar

Ghana's government is working on a new policy to buy oil products with gold rather than US dollars, Vice-President Mahamudu Bawumia said on Facebook on Thursday.

The move is meant to tackle dwindling foreign currency reserves coupled with demand for dollars by oil importers, which is weakening the local cedi and increasing living costs.

Ghana's Gross International Reserves stood at around US$6.6 billion at the end of September 2022, equating to less than three months of imports cover. That is down from around US$9.7 billion at the end of last year, according to the government.

“If implemented as planned for the first quarter of 2023, the new policy will fundamentally change our balance of payments and significantly reduce the persistent depreciation of our currency," Bawumia said.

Using gold would prevent the exchange rate from directly impacting fuel or utility prices as domestic sellers would no longer need foreign exchange to import oil products, he explained.

"The barter of gold for oil represents a major structural change," he added.

The proposed policy is uncommon. While countries sometimes trade oil for other goods or commodities, such deals typically involve an oil-producing nation receiving non-oil goods rather than the opposite.

Ghana produces crude oil but it has relied on imports for refined oil products since its only refinery shut down after an explosion in 2017.

Bawumia's announcement was posted as Finance Minister Ken Ofori-Atta announced measures to cut spending and boost revenues in a bid to tackle a spiraling debt crisis.

In a 2023 budget presentation to parliament on Thursday, Ofori-Atta warned the West African nation was at high risk of debt distress and that the cedi's depreciation was seriously affecting Ghana's ability to manage its public debt.

The government is negotiating a relief package with the International Monetary Fund as the cocoa, gold and oil-producing nation faces its worst economic crisis in a generation.

 

How Countries Should Respond to Strong Dollar?

The US dollar is at its highest level since 2000, having appreciated 22% against yen, 13% against the euro and 6% against emerging market currencies since the start of this year. Such a sharp strengthening of the dollar in a matter of months has sizable macroeconomic implications for almost all countries, given the dominance of the greenback in international trade and finance.

While the US share in world merchandise exports has declined to 8% from 12% since 2000, the dollar’s share in world exports has held around 40%. For many countries fighting to bring down inflation, the weakening of their currencies relative to the dollar has made the fight harder. On average, the estimated pass through of a 10% dollar appreciation into inflation is one percent. Such pressures are especially acute in emerging markets, reflecting their higher import dependency and greater share of dollar-invoiced imports compared with advanced economies.

The dollar’s appreciation also is reverberating through balance sheets around the world. Approximately half of all cross-border loan and international debt securities are denominated in US dollars. While emerging market governments have made progress in issuing debt in their own currency, their private corporate sectors have high levels of dollar-denominated debt. As world interest rates rise, financial conditions have tightened considerably for many countries. A stronger dollar only compounds these pressures, especially for some emerging market and many low-income countries that are already at a high risk of debt distress.

In these circumstances, should countries actively support their currencies? Several countries are resorting to foreign exchange interventions. Total foreign reserves held by emerging market and developing economies fell by more than 6% in the first seven months of this year.

The appropriate policy response to depreciation pressures requires a focus on the drivers of the exchange rate change and on signs of market disruptions. Specifically, foreign exchange intervention should not substitute for warranted adjustment to macroeconomic policies. There is a role for intervening on a temporary basis when currency movements substantially raise financial stability risks and/or significantly disrupt the central bank’s ability to maintain price stability.

As of now, economic fundamentals are a major factor in the appreciation of the dollar, rapidly rising US interest rates and a more favorable terms of trade a measure of prices for a country’s exports relative to its imports for the US caused by the energy crisis.

Fighting a historic increase in inflation, the Federal Reserve has embarked on a rapid tightening path for policy interest rates.

The European Central Bank, while also facing broad-based inflation, has signaled a shallower path for their policy rates, out of concern that the energy crisis will cause an economic downturn.

Meanwhile, low inflation in Japan and China has allowed their central banks to buck the global tightening trend.

The massive terms of trade shock triggered by Russia’s invasion of Ukraine is the second major driver behind the dollar’s strength. The euro area is highly reliant on energy imports, in particular natural gas from Russia. The surge in gas prices has brought its terms of trade to the lowest level in the history of the shared currency.

As for emerging markets and developing economies beyond China, many were ahead in the global monetary tightening cycle—perhaps in part out of concern about their dollar exchange rate—while commodity exporting EMDEs experienced a positive terms-of-trade shock. Consequently, exchange-rate pressures for the average emerging market economy have been less severe than for advanced economies, and some, such as Brazil and Mexico, have even appreciated.

Given the significant role of fundamental drivers, the appropriate response is to allow the exchange rate to adjust, while using monetary policy to keep inflation close to its target.

The higher price of imported goods will help bring about the necessary adjustment to the fundamental shocks as it reduces imports, which in turn helps with reducing the buildup of external debt.

Fiscal policy should be used to support the most vulnerable without jeopardizing inflation goals.

Additional steps are also needed to address several downside risks on the horizon. Importantly, we could see far greater turmoil in financial markets, including a sudden loss of appetite for emerging market assets that prompts large capital outflows, as investors retreat to safe assets.

In this fragile environment, it is prudent to enhance resilience. Although emerging market central banks have stockpiled dollar reserves in recent years, reflecting lessons learned from earlier crises, these buffers are limited and should be used prudently.

Countries must preserve vital foreign reserves to deal with potentially worse outflows and turmoil in the future. Those that are able should reinstate swap lines with advanced-economy central banks.

Countries with sound economic policies in need of addressing moderate vulnerabilities should proactively avail themselves of the IMF’s precautionary lines to meet future liquidity needs.

Those with large foreign-currency debts should reduce foreign-exchange mismatches by using capital-flow management or macro-prudential policies, in addition to debt management operations to smooth repayment profiles.

In addition to fundamentals, with financial markets tightening, some countries are seeing signs of market disruptions such as rising currency hedging premia and local currency financing premia.

Severe disruptions in shallow currency markets would trigger large changes in these premia, potentially causing macroeconomic and financial instability.

In such cases, temporary foreign exchange intervention may be appropriate. This can also help prevent adverse financial amplification if a large depreciation increases financial stability risks, such as corporate defaults, due to mismatches.

Finally, temporary intervention can also support monetary policy in the rare circumstances where a large exchange rate depreciation could de-anchor inflation expectations, and monetary policy alone cannot restore price stability.