Karachi, December 20, 2013 (PPI-OT): The Executive Board of the IMF has completed its quarterly review of the EFF program and has approved immediate disbursement of about US$550mn.
According to AKD Securities, in doing so, the performance criterion on net international reserves was also waived. While expressing overall satisfaction over Pakistan’s performance in the program thus far, the IMF has pointed out the need to deepen structural reforms, improve tax administration, further enhance energy sector efficiency and rebuild fx reserves. Regarding the latter, the IMF has called for the SBP to use the policy tools at its disposal, including policy rate adjustments.
Considering AKD Securities is still early in the new IMF program, and the GoP has taken tough decisions on the fiscal front, AKD Securities sees continued smooth release of quarterly disbursements under the EFF program particularly over 2014 which will see sizeable repayments to the IMF pertaining to the previous SBA program. With other multilaterals expected to continue their own disbursements, it appears that fx reserves have bottomed out with fresh FDI/privatization proceeds to provide impetus.
FX reserves: As at Dec 13’13, total fx reserves have increased by ~US$500mnWoW to US$8.53bn, driven by an increase in SBP reserves to US$3.47bn. In this regard, chunky inflows received by the central bank include US$144mn from the UK’s DFID, US$137mn from the IDB and US$149mn from other multilateral institutions. Following the disbursement of US$550mn from the IMF (vs. repayments of ~US$270mn across the next two weeks), the SBP’s reserves should climb to about US$3.75bn by early Jan’14. While fx reserves appear to have bottomed out, implied import cover would still be a limited ~2.5m through, underpinning the need to rebuild FX reserves through the GoP’s own initiatives. Key checkpoints on this front are 1) FDI trend (up 5%YoY to US$331mn in 5MFY14) and 2) privatization proceeds. Onus on the SBP.
The IMF press release has called for the central bank to use the policy tools at its disposal to boost reserves through policy rate adjustment, reserves purchases, and greater exchange rate flexibility. Based on AKD Securities’ estimated FY14 CPI average of 10%+, AKD Securities sees the SBP increasing the DR by a further 100bps to 11% by end-FY14.
Furthermore, while AKD Securities maintains AKD Securities’ end-Jun’14 estimate of the PkR/US$ parity at about 108 (recent recovery is encouraging) another dip in fx reserves can potentially lead to a bout of fresh pressure on the PkR. and also on the MoF: While the IMF has highlighted the GoP’s steps to address fiscal imbalances and energy sector issues, it has flagged that overall vulnerabilities remain high with a particular need to improve tax administration/plug tax loopholes.
While the IMF press release does not delve into specifics, AKD Securities believes further near-term steps on the GoP’s agenda would be to phase out the SRO culture, raise gas tariffs and fast-track the privatization process. Thus far, buoyed by provincial surpluses, the consolidated 1QFY14 fiscal deficit has been recorded at 0.50% of GDP which is encouraging.