Investors Fret Seeing Pakistan So Near, Yet So Far From IMF Deal

(Bloomberg) -- Pakistan’s rupee slumped to a record low last week and local stocks plunged as investors turned bearish on the nation’s assets amid uncertainty over the fate of a bailout from the International Monetary Fund.

Continuation of the loan from the Washington-based lender has gone from looking like an easily done deal in April to a match of patience seven months later as Islamabad tried to negotiate concessions on some of the program conditions.

Analysts see some IMF demands, particularly around central bank reforms, holding back the deal that Finance Minister Shaukat Tarin had expected to clinch by Nov. 5. Days later, there’s no sign of an agreement, which is contributing to the rupee’s reign as Asia’s worst-performer -- adding to the woes of Prime Minister Imran Khan who is grappling with the region’s fastest inflation and accusations from the opposition of mismanaging the economy.

Pakistan secured a $6 billion IMF loan in 2019 to avert a balance of payments crisis, only to see the program halted a year later amid the pandemic. While the lender of last resort agreed to resume the loan in March, Shaukat Tarin, the nation’s finance chief appointed in April, sought easier conditions, including leaving income tax and power tariffs unchanged. A decision on release of additional loan installments has since proved elusive despite several rounds of meetings between officials from both sides.

“Finalizing the deal has become imperative as prolonged uncertainty is eroding confidence in the ability of policy makers to execute their agenda,” said Mustafa Pasha, chief investment officer at Lakson Investments Ltd. “It is the pivot from growth to stabilization that is causing a problem.”

The IMF funds are a necessary cushion for the economy, as it emerges from Covid-induced disruptions. The State Bank of Pakistan has already begun withdrawing pandemic-era stimulus to fight inflation at the cost of slowing the economy’s recovery.

“Prima facie there appear to be two main hoops of fire for the government,” said Sakib Sherani, a former economic adviser to the finance ministry. 

The first is the IMF’s conditions to end some of the finance ministry’s oversight on SBP by removing its nominee on the central bank board and giving the monetary authority immunity from lawsuits. These demands have met with resistance from both the ministry as well as lawmakers and looks unlikely to get the parliament’s nod in its current form.

The second sticking point has been the move to a Treasury Single Account, which requires moving all government funds from banks to the central bank, said Sherani.

Weaker Rupee

The benchmark KSE-100 index has fallen 5.4% from its June peak, even as the rupee held on to losses. Fitch Ratings sees the currency averaging 180 a dollar in 2022 due to the nation’s worsening terms of trade, tighter U.S. monetary policy and the flow of dollars out of Pakistan into Afghanistan. 

“The uncertainty in terms and conditions and timing of the IMF program is also impacting the currency and weakening sentiment,” said Mohammed Ali Hussain, head of research at Dubai-based Frontier Investment Management Partners Ltd. “However, I believe once the IMF program is in place you will see rupee appreciate.”

The IMF and Pakistan have settled differences on the fiscal side, Tarin had said last month without giving specific details. The talks are at an advanced stage, he said again on Sunday in Karachi.

Islamabad has moved to raise power tariffs, as also gasoline and diesel prices, decisions that are seen helping the government meet fiscal targets set by the IMF. The central bank, which is due to review policy settings next week, has separately raised cash reserve requirements for banks to absorb excess liquidity from the system.

“These decisions indicate that we are very close to the IMF deal,” said Suleman Maniya, head of advisory at Karachi-based Vector Securities Pvt. “The decision making has been slow and destroyed investor sentiment in the process.”

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