As anticipated, the Executive Board of the International Monetary Fund (IMF) have approved a 9-month Stand By Agreement (SBA) for Pakistan amounting to US$3bn (SDR 2,250mn). The approval allows for an immediate disbursement of US$1.2bn. The remaining amount will be phased over the program’s duration, subject to two quarterly reviews. To recall, IMF staff agreed to provide a new short-term loan SBA to Pakistan on June 30, 2023, after Pakistan failed to complete the previous EFF.
Since then, Pakistan’s short-duration Eurobonds (2024 and 2025) have rallied 13%, local equities are up 10%, and PKR has appreciated by 3% against USD.
There was some confusion regarding IMF Board approval as the IMF team preferred to meet the key political parties before the final approval.
With IMF money along with US$2bn from Saudi and US$1bn from UAE along with other bilateral and multilateral inflows, Pakistan’s liquid FX reserves with SBP is likely to reach US$8-9bn. This is in addition to US$5.3bn of public money with banks and US$4bn worth of Gold lying with the government.
This will improve Pakistan’s liquidity position as import Cover will rise from 1.2 to 2.2. This is still below the long-term 10-year average of 2.8.
Interestingly most of the estimates provided by the IMF in their release align with government targets for FY24, but the inflation estimate differs.
Pakistan’s government is estimating average CPI inflation of 21% which is in line with street forecast. Our estimate is 20-22% for FY24, considering last year’s high base, relatively stable currency and falling global commodity prices. However, IMF is estimating inflation of 26%.
In a Tbill auction yesterday before IMF board approval, many investors participated in a long-term one-year paper signalling market expectations of falling inflation and policy rate.
We believe this better-than-expected loan by IMF will provide the much-needed economic stability to Pakistan when Pakistan sees a transfer of power from one government to caretakers and then to a New government.
In the past, we have seen the government not complying with IMF conditions due to political reasons. But now, considering that the ruling PDM government term will end in the next few weeks, chances of non-compliance by the caretaker and new government seem less as the election by that time will be over.
Courtesy – Topline Securities