The Executive Board of the International Monetary Fund (IMF) is set to meet today (Monday) to consider a loan plan for Pakistan, as officials in the cash-strapped country expect a month to come. The stalled $6 billion bailout program will resume.
However, a rally in the country’s assets could be muted amid heightened political tensions.
Pakistan also requested the fund’s board to increase the Expanded Fund Facility (EFF) from $6 billion to $7 billion and jack up the timeframe from September 2022 to June 2023.
- Cash-strapped Pakistan is expected to resume a stalled $6 billion bailout program.
- “I expect the next 12 months to be challenging with the elections,” says the analyst.
- Economists say political uncertainty will pose a major threat to Pakistani assets.
The recent letter written by the Finance Minister of Khyber Pakhtunkhwa to the Federal Finance Minister may create an embarrassing situation for Pakistan during the IMF board meeting, but government circles are confident that the board will not take up the matter.
However, it is feared that the representative of India may try to highlight this issue in the meeting to embarrass the representative of Pakistan.
Columbia Threadneedle Investments, Tellimer Limited and Natixis SA predicted that Pakistan will receive loan approval from the IMF’s board on Monday, paving the way for “an immediate release of $1.2 billion in funds”.
However, amid the ongoing political upheaval in the country, attention is expected to shift to PTI Chairperson Imran Khan’s court hearing two days later as he battles legal troubles.
“I think a big part of the market rally is already in the price,” said Eng Tat Low, an independent emerging markets analyst at Columbia Threadneedle in Singapore. “I expect the next 12 months to be challenging with the general election.
The risk of a worsening political backdrop remains substantial and high, and it is a risk that is not likely to abate anytime soon.
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It should be noted that after Belarus, Pakistan’s dollar bonds have been the top among the emerging markets in August. Meanwhile, the rupee also rose against its peers as investors cheered the prospect of IMF funds.
However, developments on the political front could threaten the fragile financial stability as Imran Khan’s supporters protested.
“Political uncertainty will persist with speculation about early elections,” said Junio Tan, an economist at Natixis in Singapore. This will become a major threat to Pakistani assets.
The mixed performance of Pakistan’s dollar bonds underscores the country’s “rocky road ahead”. Notes due in December were traded at about 94 cents on the dollar on Friday, down from a low of 85 cents in July, as investors grew more confident that the debt would be repaid.
Meanwhile, bonds due in 2031 are still quoted below 60 cents on the dollar in the distressed territory.
Columbia Thread Needle expects Pakistan bond prices to remain within a range over the next 12 months. “Dollar bonds have returned investors about 16 percent this month,” according to Bloomberg Indices.
According to London-based research firm Telemer, the Pakistani rupee – which gained 8% this month to 220.52 per US dollar on Friday – is likely to weaken to 240 by the end of 2022.
“Pakistan’s government will need to deliver on its reform commitments to get its debt and reserves on a sustainable path,” said Patrick Kern, senior economist at Taylor’s.
“Any deviation from its reform targets, however small, could shake market confidence and send the rupee back into a tailspin.”
Pakistan’s track record with the IMF can be described as “tumultuous”. The previous PTI-led government had secured a bailout program in 2019 that stalled several times due to Islamabad’s failure to meet certain loan conditions.
The government led by Prime Minister Shehbaz Sharif will get a big boost from the resumption of the program as it will help it avoid the second default in Asia this year, after Sri Lanka.
According to Bloomberg Economics, Islamabad needs to pay at least $3 billion to service debt in the first half of fiscal 2023.
With the IMF loan paving the way for further financing, the State Bank of Pakistan expects foreign exchange reserves to increase to about $16 billion from $7.8 billion this fiscal year.
Elections should be held by the second half of 2023, although Khan has called for early elections, challenging the legitimacy of the government.
“Unless a new civilian government comes in with a new electoral mandate, it is very difficult to see a consistent path for economic policy, and hence a sustainable or Smooth rally,” said Hasnain Malik, head of EM equity strategy at Telemar in Dubai.
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