$1.38 bn injection to cushion economy from external risks

ISLAMABAD: With the approval of $1.38 billion addressing external risks to Pakistan’s economy in the wake of COVID-19 outbreak, the International Monetary Fund (IMF) has cut down all macroeconomic targets including shrinking GDP growth, worsening budget deficit especially primary deficit, escalating debt burden, reducing remittances, and exports and investment.

The Fund has massively slashed down the FBR’s annual target and estimated maximum collection of Rs3,908 billion in the post-COVID-19 situation against pre-COVID-19 estimates of Rs4,803 billion till June 30, 2020. The debt burden, according to IMF, will go up to 90 percent of GDP against pre-COVID estimates of 85 percent by end of the current fiscal year 2019-20.

It’s relevant to mention that the government had envisaged annual tax collection target of Rs5,555 billion but after first review of IMF, the target was revised downward to Rs5,238 billion. On eve of incomplete second review, the IMF agreed to revise it further downward to Rs4,803 billion. After eruption of COVID-19, the IMF further slashed down the target to Rs3,908 billion by end June 2020, slightly over tax collection of Rs3832 billion in last financial year 2018-19.

The IMF staff has re-adjusted all targets on macroeconomic front over period of next three years in the wake of post COVID-19 and termed it the worst economic situation since 1950.

After approval of Rapid Finance Instrument (RFI) of $1.38 billion, the IMF staff report also warned about escalating debt burden that would touch 90 percent of GDP by end of ongoing financial year 2020 against pre-COVID-19 assessment of 85 percent of GDP. The gross foreign currency reserves will also decrease to $11.9 billion in FY 2020 against pre COVID-19 estimates of $12.5 billion.

The gross external financing needs will also be increased and will be standing at $25 billon for FY 2020 and $29 billion next fiscal year 2021.

Public finances, the IMF says, are expected to come under significant pressure. The primary deficit is now expected to deteriorate to 2.9 percent of GDP in FY 2020 (from 0.8 percent expected earlier) over next three years period due to a 1.8 percentage point decline in tax revenue relative to the pre-virus baseline, and the needed higher spending to support the health response, social safety nets for the very poor, and employment.

The shock has given rise to an urgent balance of payments (BoP) need. While the fall in oil prices and weaker import demand provide some support to the current account, the Covid-19 shock will have a severe impact on the balance of payment (BoP). In particular, (i) export growth is likely to come to a halt due to the fall in external demand; (ii) remittances are expected to drop by over US$5 billion during FY 2020 and FY 2021 as activity in GCC countries declines; and (iii) outflows from non-resident holdings of domestic treasuries could continue, despite having experienced $2.0 billion in outflows so far. This scenario will result in new external financing needs of about US$2.0 billion (0.8 percent of GDP; SDR 1,400 million) in Q4 FY 2020.

It is envisaged that these urgent external financing needs will be met through the use of Fund credit under the RFI and fresh resources of around US$250 million committed by multilateral partners. These disbursements would maintain central bank reserves at US$12.0 billion (2.7 months of imports) by end-FY 2020 — a level similar to that prior the shock.

Moreover, a potential financing gap of around $1.6 billion could emerge in FY 2021, which would be filled through the use of reserve assets, additional support from multilateral partners, and, if needed, additional policy adjustments.

The Pak authorities reiterated their commitment to resume the reforms included in the EFF once the crisis abates. These reforms are crucial to boost Pakistan’s growth potential to deliver broad based benefits for all Pakistanis, especially the most vulnerable segments of the population.

Reassuringly, the authorities have reaffirmed their commitment to the EFF and to implement the key policies in the program that will help support growth, build buffers, reduce public debt, and strengthen governance.

In this regard, they underscored their commitment to maintain the fiscal consolidation strategy and efforts in energy sector and governance reforms embedded in the EFF.

However, according to IMF press statement on Friday, the IMF approved the disbursement of $1.386 billion under the Rapid Financing Instrument (RFI) to address the economic impact of the Covid-19 shock.

With the near-term outlook deteriorating sharply, the authorities have swiftly put in place measures to contain the impact of the shock and support economic activity. Crucially, health spending has been increased and social support strengthened.

As the impact of the COVID-19 shock subsides, the authorities’ renewed commitment to implement the policies in the existing EFF will help support the recovery and strengthen resilience. The Executive Board of the International Monetary Fund (IMF) approved a purchase of Pakistan under the Rapid Financing Instrument (RFI) equivalent to SDR 1,015.5 million (US$ 1.386 billion, 50 percent of quota) to meet the urgent balance of payment needs stemming from the outbreak of the COVID-19 pandemic.

While uncertainty remains high, the near-term economic impact of COVID-19 is expected to be significant, giving rise to large fiscal and external financing needs. The IMF support will help to provide a backstop against the decline in international reserves and provide financing to the budget for targeted and temporary spending increases aimed at containing the pandemic and mitigating its economic impact. The IMF remains closely engaged with the Pakistani authorities and as the impact of the COVID-19 shock subsides will resume discussions as part of the current EFF. The Executive Board discussion, Mr. Geoffrey Okamoto, First Deputy Managing Director and Acting Chair stated, “The outbreak of Covid-19 is having a significant impact on the Pakistani economy. The domestic containment measures, coupled with the global downturn, are severely affecting growth and straining external financing. This has created an urgent balance of payments need.

“In this context of heightened uncertainty, IMF emergency financing under the Rapid Financing Instrument provides strong support to the authorities’ emergency policy response, preserving fiscal space for essential health spending, shoring up confidence, and catalyzing additional donor support.

“In response to the crisis, the government of Pakistan has taken swift action to halt the community spread of the virus and introduced an economic stimulus package aimed at accommodating the spending needed to tackle the health emergency and supporting economic activity. Crucially, the authorities are increasing public health spending and strengthening social safety net programs to provide immediate relief to the most vulnerable.

Similarly, the State Bank of Pakistan has adopted a timely set of measures, including a lowering of the policy rate and new refinancing facilities, to support liquidity and credit conditions and safeguard financial stability. In this context, the authorities’ policies should be targeted and temporary.

“As the crisis abates, the authorities’ renewed commitment to the reforms in the existing Extended Fund Facility—in particular those related to fiscal consolidation strategy, energy sector, governance, and remaining AML/CFT deficiencies—will be crucial to entrench resilience, boost Pakistan’s growth potential, and deliver broad based benefits for all Pakistanis. “Expeditious donor support is needed to close the remaining balance of payments gap and ease the adjustment burden.”