ISLAMABAD: The threat of default of Pakistan seems to be over now, at least for a year as the International Monetary Fund (IMF) and Pakistan government has signed the staff level agreement, made public today (July 14).
The IMF has agreed to extend the duration of the loan programme to June 2023 with increase in amount to $7 billion as against original loan amount of $6 billion.
As long as Pakistan is part of the IMF programme, there will be no threat or risk of default because the country can raise a sufficient amount of loans to meet its foreign exchange reserves requirements without facing any hurdles.
When the coalition government came to power, the country was facing default threat with rapidly declining foreign exchange reserves of the central bank, to $8.2 billion in June. In April the SBP’s reserves stood around $10.5 billion and the national reserves, including commercial banks forex, totaled at $16.6 billion. But in few weeks the reserves of the SBP wiped out quickly and fell below $8.2 billion because of suspension of the IMF programme after the PM Imran Khan breached the agreement and reduced electricity tariff and capped oil prices, when he came to know that his government was being thrown out through a well-planned no-confidence move on April 9, 2022.
However, in the last week of June the government received $2.3 billion loan from a consortium of Chinese banks which boosted the reserves to above $10 billion. In the past few days, the value of rupee was under immense pressure and dollar was gaining value almost daily, the dollar-rupee exchange rate surged to above 210 rupees on July 13, after crossing 212 rupees level in the inter-bank and 215 in the open market in June.
As the IMF has announced the signing of the staff level agreement on July 14, this much-expected development has discouraged dollarization and turned the stock market sentiment bullish. On Thursday (July 14), the value local currency increased by more than two rupees because of the announcement of IMF-government staff level agreement of resumption of loan which will lead to disbursement of about $1.17 billion in coming few days.
The IMF programme will remain intact till June 2023, and after that once again Pakistan will be on the edge of low foreign exchange reserves, pressure on value of rupee and the risk of default will surface with more vigour because the country will require more foreign exchanges in the next financial year, 2023-24, to meet its foreign exchange requirements.
For example, in 2022-23 the government needs at least $21 billion to repay foreign loans and another $16 billion for the current account imbalance, etc. And in the next fiscal year, the foreign exchange requirements will, indeed, be much more than the current financial year. It may be possible that after the completion of IMF programme in June 2023, the coalition government may not involve in new programme and leave it to the winners of the general elections, expected in August 2023. How the issue of default and foreign loans will be managed at that time? Will the IMF again be willing to offer new loans and at what terms and conditions? These issues must be kept in mind to avoid Sri Lanka-like chaotic situation in the country in 2023 and beyond that.