The IMF Executive Board has approved a US$6bn 39-month Extended Fund Facility (EFF) for Pakistan, with about US$1bn to be released immediately and the balance to be disbursed across the duration of the program, subject to four quarterly reviews and four semi-annual reviews.
The IMF has called for a “market-determined exchange rate, an adequately tight monetary policy and decisive fiscal consolidation”. As part of pre-program conditions, Pakistan has already shifted to a market-determined exchange rate (the PKR has depreciated by 10.5% since the staff-level agreement signed on May 12th ), real interest rates stand at +3.3% (based on June’s CPI) and the recently passed FY20 Budget takes the first step in a multi-year revenue mobilization effort (the aim is to increase revenue - at the federal and provincial level - by 4-5% of GDP over the duration of the program).
What is new, however, is the expectation for US$38bn to materialize over the course of the program, from multilateral and bilateral creditors. It is unclear if this figure includes the assistance from GCC countries some of which has already materialized. According to the IMF, this will help Pakistan meet its large financing needs in the coming years, and grow external buffers. Gross fx reserves are projected to rise to US$11.2bn by June 2020, up from c US$7bn at present. This will increase the import cover from 1.4 months to 2.2 months.
The IMF’s press release makes no mention of privatizations but emphasizes the need for (i) energy reforms (cost recovery to be gradually achieved), (ii) eliminating central bank financing of the budget deficit and (iii) strengthening institutions. Given the interim slowdown in growth, the IMF also highlights that social spending will be expanded so as to protect the most vulnerable.
A relatively large initial disbursement of US$1bn from the IMF, together with the estimated US$38bn of bilateral and multilateral assistance over the next c3 years, may potentially allow the PKR to strengthen in the immediate-term, and the KSE-100 to extend its recent bounce (the Index is up 3.3% in the last three trading sessions). However, given that interest rates may yet increase this quarter, and that the overhang from the FATF is still not over (final decision due in October), there are risks to the continuation of this rally. We would tailor our investment strategy accordingly, by selling on strength and waiting for dips to build new positions in selected names such as UBL, OGDC, HUBC, EFERT and PSO.