The governor of Pakistan’s central bank has dismissed market concerns over Islamabad’s worsening liquidity crisis as “exaggerated” and said he expected the IMF to approve $1.3 billion in new financing for the tight Asian country in August. .
Murtaza Syed also told the Financial Times that Pakistan was in talks with countries in the Middle East such as Saudi Arabia and China “to get a little bit of the extra money we need” as it struggles with rising commodity prices. , falling exchange rates reserves and a falling currency.
“On the external debt service side, the next 12 months — while they look challenging — aren’t as dire as I think some people make them seem,” Syed said. “Especially because we have the coverage of the IMF program during what is going to be a very difficult 12 months globally.”
Sri Lanka’s default on its external debt in May has fueled fears about the risk of default in other emerging economies.
The Pakistani rupee lost more than 7 percent of its value against the US dollar last week, the strongest weekly decline since 1998, following a regional poll win for Imran Khan, who was ousted as prime minister just a few months ago.
Pakistan’s growing current account deficit has depleted its foreign exchange reserves, which have fallen $7 billion since February to just over $9 billion in July, Syed said, equivalent to a month and a half worth of imports.
Fitch Ratings revised its outlook for the country from stable last week from negative to negative due to what it called “significant deterioration in Pakistan’s external liquidity position and financing conditions since early 2022”.
However, Syed, who worked for the IMF for 16 years, said Pakistan’s debt problems cannot be compared to Sri Lanka’s problems. “Those fears are exaggerated and in fact Pakistan does not belong to that very bad category of countries,” he said.
Unlike Sri Lanka’s tourism-dependent economy, he said, Pakistan had “a fairly good Covid situation”, with a milder economic contraction and stronger recovery than its smaller neighbour.
While Sri Lanka owes about 40 percent of its debt to commercial lenders, most of Pakistan’s debt owes to multilateral institutions and bilateral lenders, he added.
“We have external financing needs of about $34 billion over the next 12 months and we have already identified financing from the IMF program of more than $35 billion,” he said. “So we’re basically overfunded.”
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Syed said he expected the next IMF disbursement of $1.3 billion from its $7 billion IMF facility to be approved in August, although this could be complicated by the summer break. “We try to push for it sooner or later,” he said.
An analyst said that while Sri Lanka’s economic situation was worse than Pakistan’s, the political risk in Colombo decreased but worsened in Islamabad.
“In Sri Lanka, the crisis is so immediate and so severe that there is broad consensus in the political class about what needs to be done,” said Peter Mumford of the Eurasia Group.
“If Sharif or Khan becomes prime minister, there will be differences in fiscal policy that would affect the viability of an IMF program.”
Khan’s upset victory last week in Punjab, the country’s largest province, has increased the likelihood of snap elections that could topple Shehbaz Sharif’s government.
However, Syed said his “strong baseline” was that the Sharif government would remain in power. Even in the “hypothetical” case of snap elections, he added, the IMF had a history of pro-government programs.
“I think there is broad recognition across the political spectrum that the next 12 months will be difficult for emerging markets and also for Pakistan,” he said.
Twitter: @JohnReedwrites