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IMF disburses US$1.13bn tranche

The Executive Board of the IMF has completed fourth review of Pakistan economic performance under the stand-by arrangement (SBA) on May 14th. The IMF acknowledged the progress so far on the macro front but has also flagged vulnerabilities. Key highlights of the review are:

  • US$1.13bn tranche disbursed to Pakistan.
  • Total disbursement under the SBA is now US$7.3bn (48% of Fx reserves).
  • Remaining amount of the SBA to be rephased into two, US$1.7bn each.
  • 4QFY10 budget deficit ceiling, 0.9% of GDP, adjusted upward to 1.05%.
  • Floor on Central Bank’s net foreign assets raised by US$0.3bn to US$5.2bn.

Measured recovery intact….. 
The fact remains that despite structural problems holding foot, Pakistan macros have stabilized relative to FY09. And this stability has buttressed measured growth in the economy so far – inline with our view.  Considering this, the IMF board in its press release on Pakistan economic performance has also acknowledged the progress on macro front – external position (CAD down 68% in 9MFY10 to US$2.7bn) has strengthened and manufacturing sector is showing recovery (4.4% in 9MFY10). 

….challenges and risks stay put
However vulnerabilities are still high. This is evident in still weak fiscal position (deficit and delay in external financing), persistent inflation (13.3% YoY April-10) and energy shortages (~30% of peak demand). To keep risks to macro stability at bay, IMF has called for credible fiscal consolidation and a cautious stance towards the monetary policy. Revenue mobilization measures (tax reforms) and electricity sector reforms are now at the top of the agenda. We expect the Central bank to maintain its status quo on policy rate until things improve on fiscal side and inflation moderates.

The way forward in FY11E
Details of review conducted by IMF board are not yet released which would reveal key macro targets, policy measures and structural reforms agreed between the government of Pakistan and the IMF. Moreover, currently, a pre-budget meeting is underway between the IMF and Pakistani authorities. In our view, macro direction going into FY11E (Jul-Jun) would depend on the outcome of these two meetings. Key challenges now remain 1) introduction of value added tax 2) Tariff pass-through 3) Bridging the energy deficit.

KASB Securities and Economics Research

17 May 2010

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