IMF disburses $1.4bln to help Pakistan cushion COVID-19 shocks

KARACHI: Pakistan on Wednesday received $1.4 billion of loan from the International Monetary Fund (IMF) under a rapid financing instrument to overcome the virus fallout on the country's external account position.

The State Bank of Pakistan (SBP) confirmed the receipt. “SBP has received $1.39 billion under rapid financing instrument by the IMF," the central bank said in a tweet.

The executive board of the IMF last week approved a purchase of Pakistan under the rapid financing instrument (RFI) equivalent to SDR1.015 billion ($ 1.386 billion, 50 percent of quota) to meet the urgent balance of payment needs stemming from the outbreak of the COVID-19 pandemic.

State Bank Governor Reza Baqir said RFI has been disbursed because the IMF program is on track. Last year, IMF agreed to lend $6 billion to help Pakistan put off balance of payment crisis.

“Current account is expected to improve,” Baqir told analysts in a video conference. “External financing for Pakistan is better compared to its peers like Sri Lanka due to support from international financial institutions.”

Baqir said part of Pakistan’s fiscal measures would be supported by the IMF’s emergency loan. “For emerging markets, the great global lockdown has been the mother of all external shocks,” he said in an interview with Bloomberg. “Among EM, the problem is particularly exasperated for high debt emerging markets because they have limited policy space to undertake expansionary policies.”

SBP already delivered 425 basis points of rate cuts this year, complementing a $2.5 billion plus spending plan of the government to cushion the impact.

IMF said Pakistan is facing unprecedented health and economic shocks from the rapid propagation of the COVID-19 outbreak. Growth is expected to contract sharply by negative 1.5 percent in FY2020, as the economy is buffeted by demand and supply shocks.

IMF expected export growth to come to a halt due to the fall in external demand. Remittances are expected to drop by over $5 billion during FY2020 and FY2021 as activity in Gulf Cooperation Council countries declines and outflows from non-resident holdings of domestic treasuries could continue, despite having experienced $2 billion in outflows so far.

“This scenario will result in new external financing needs of about $2 billion (0.8 percent of GDP) in Q4 FY2020,” it said. “These urgent external financing needs will be met through the use of fund credit under the RFI and fresh resources of around $250 million committed by multilateral partners.”

IMF said the disbursements would maintain the central bank’s reserves at $12 billion – 2.7 months of imports – by end-FY2020, “a level similar to that prior the shock”. “Moreover, a potential financing gap of around $1.6 billion could emerge in FY2021, which would be filled through the use of reserve assets, additional support from multilateral partners, and, if needed, additional policy adjustments.”

Baqir said the country’s external debt is approximately 30 percent of total public debt, which is much lower than other major emerging markets. IMF expects the economy’s debt to increase to around 90 percent of gross domestic product in FY2020 against 85 percent estimated before the virus outbreak. “Subsequently, it will drop gradually over the next five years,” it said.