Pakistan’s central bank governor dismissed market concerns over Islamabad’s worsening liquidity crisis as “overblown” and said he expected the IMF to approve new funding of $1. $3 billion for the cash-strapped Asian country in August.
Murtaza Syed also told the Financial Times that Pakistan was engaged in talks with countries in the Middle East, such as Saudi Arabia, as well as with China “to get some of the extra money that we have need” as it faces rising commodity prices, falling foreign exchange reserves and a depreciating currency.
“On the external debt service side, the next 12 months – although they look tough – are not as dire as I think some people are making out,” Syed said. “Especially since we have IMF program coverage for what is going to be a very challenging 12 months globally.”
Sri Lanka’s default on its external debt in May fueled fears about default risk in other emerging economies.
The Pakistani rupee lost more than 7% of its value against the US dollar last week, the biggest weekly decline since 1998, after the regional victory of Imran Khan, who was ousted as prime minister a year ago. just a few months.
Pakistan’s growing current account deficit has depleted its foreign exchange reserves, which have fallen by $7 billion since February to just over $9 billion in July, Syed said, equivalent to a month and a half of imports.
Fitch Ratings revised its outlook for the country to negative from stable last week due to what it called “a significant deterioration in Pakistan’s external liquidity position and financing conditions since the start of 2022”.
However, Syed, who worked for the IMF for 16 years, said Pakistan’s debt vulnerability could not be compared to Sri Lanka’s problems. “These fears are exaggerated and in fact Pakistan is not in this very bad category of country,” he said.
Unlike Sri Lanka’s tourism-dependent economy, he said, Pakistan “had a pretty good Covid”, with a milder economic contraction and a stronger recovery than its smaller neighbour.
While Sri Lanka owes about 40% of its debt to commercial lenders, most of Pakistan’s debt is owed to multilateral institutions and bilateral lenders, he added.
“We have external financing needs of around $34 billion over the next 12 months and we have already identified financing due to the IMF program of over $35 billion,” he said. “So we’re overfunded, actually.”
Syed said he expected the IMF’s next disbursement of $1.3 billion from its $7 billion facility to be approved in August, although that could be complicated by the summer holidays. “We are trying to push for this as soon as possible,” he said.
An analyst said that although Sri Lanka’s economic situation was worse than Pakistan’s, in Colombo political risk was decreasing but in Islamabad it was deteriorating.
“In Sri Lanka, the crisis is so immediate and so severe that there is a broad consensus in the political class on what needs to happen,” said Peter Mumford of the Eurasia Group.
“Whether Sharif or Khan is prime minister, there will be differences in fiscal policies that will affect the viability of an IMF program.”
Khan’s surprise victory last week in Punjab, the country’s largest province, raised the likelihood of a snap election 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 early elections, he added, the IMF used to pursue programs with caretaker governments.
“I think there’s broad recognition across the political spectrum that the next 12 months are going to be tough for emerging markets and are going to be tough for Pakistan as well,” he said.
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