Since July 22, numerous unauthorized exchange points have been closed after the military intelligence agency summoned foreign exchange traders to address the rising dollar rate in the open market. photo: file
ISLAMABAD:
As Saudi Arabia provided a new $3 billion loan to fill a sudden hole in reserves, the government decided to ask the International Monetary Fund to increase the size of the current $7 billion bailout package to offset the impact of the Middle East war on the economy.
Official sources told The Express PAkGazette that deliberations have been underway in the Prime Minister’s Office and the Finance Ministry to increase the size of the $7 billion Expanded Fund Facility, which will end in September next year. With the approval of the fourth tranche of $1 billion next month, Pakistan has so far drawn down $4 billion.
This development came on the heels of Saudi Arabia’s decision to extend another financial rescue package to Pakistan to help the nation meet its external financing needs in line with IMF requirements.
Finance Minister Muhammad Aurangzeb said Wednesday that Saudi Arabia has committed $3 billion in additional deposits, with disbursement expected next week. He further stated that the current $5 billion Saudi deposit would no longer be subject to the previous annual renewal agreement and would instead be extended for a longer period.
With the new loan, Saudi Arabia has become the largest country to have placed a total of $8 billion in cash deposits with the central bank. A $3.5 billion hole has emerged in gross official foreign exchange reserves after the United Arab Emirates failed to refinance its debt despite making commitments to the IMF.
Pakistan expects a total new financial assistance of $5 billion from friendly countries to maintain reserves at their current levels.
Aurangzeb said the government remained committed to maintaining reserves in line with its obligations under the IMF, including the goal of reaching around $18 billion in reserves, equivalent to about 3.3 months of import cover, by the end of the fiscal year.
The Express PAkGazette had first reported in January that the UAE was not granting a one-year extension to Pakistan, but at that time the Finance Minister hoped that the friendly country would soon extend the debt by one year.
Additional IMF loan
Government sources told The Express PAkGazette that it had been decided to seek an additional loan from the IMF under the existing package and there was a good chance that the IMF would meet Pakistan’s request.
The IMF managing director has said her organization was expecting funding requests of $50 billion from member countries to deal with the shocks of war in the Middle East.
Sources said IMF executive directors were also urging the Fund’s management to increase existing programs or provide new financing windows. They added that it may not be possible to seek a new line of financing from the IMF, but the existing program can be expanded with additional loans.
Pakistan can avail up to 600% of its quota in the IMF and has so far exhausted 350% of the total quota. Sources said there was a window available of between $2 billion and $2.5 billion, which Pakistan wanted to use to deal with the effects of the war in the Middle East.
Sources said Pakistan was eligible to avail additional financing from the IMF to cope with the shocks of the war. They said there was a good chance that the IMF would accept Pakistan’s request to increase the size of the loan.
Extending a loan to Pakistan to cope with the impact of the war would not be a favour, but would help the country tide over the crisis, sources said.
With 600% quota, Pakistan can avail a total loan of $16 billion and has exhausted $9.5 billion. This makes a strong argument for an increase under the current Expanded Fund Facility program.
Finance Ministry officials said Aurangzeb raised the issue of additional financing with Dan Katz, first deputy managing director of the IMF.
A Finance Ministry pamphlet, issued after the meeting between the IMF deputy managing director and the finance minister in Washington, stated that Aurangzeb contacted Dan Katz “about the continuity of the program and the impact of the external shock.”
The Finance Ministry further stated that Aurangzeb briefed the first deputy director general on the immediate impact of the ongoing conflict on Pakistan’s economy, particularly in relation to power procurement and logistics.
Aurangzeb “briefed IMF leadership on Pakistan’s ongoing assessment of the second- and third-order effects of the crisis, including implications for inflation, growth, exports and remittances,” according to the announcement.
The government’s position on the impact of the war has changed, as it had previously told the IMF that its external sector would remain stable despite the war.
Sources said there were two options: advance the additional IMF loan or give it tranches.
However, greater exposure to IMF debt would also increase interest rates and surcharges, the sources said. They said Pakistan will have to pay higher interest rates to the IMF to avail the additional facility.
Aurangzeb also raised the issue of higher surcharges on additional loans with the IMF during his visit. Muhammad Aurangzeb called for an early and substantial review of IMF surcharges, saying this had significant implications for developing economies.
Sources said the high surcharges can be avoided by convincing the IMF to advance the additional loan amount instead of staggering it in tranches.
The IMF mission will also arrive in Pakistan in the middle of next month to finalize the new budget, including deliberations on tax issues.
