Since July 22, several unauthorized exchanges have been closed after the military intelligence service called in currency traders to counter the rising dollar rate on the open market. photo: file
ISLAMABAD:
As Saudi Arabia extended a new $3 billion loan to fill a sudden gap in reserves, the government has decided to ask the International Monetary Fund to increase the size of the current $7 billion bailout package to offset the impact of the Middle East war on the economy.
Official sources told The Express Pakinomist that discussions have taken place in the Prime Minister’s Office and the Finance Ministry to increase the size of the $7 billion Extended Fund Facility, which will end in September next year. With the approval of the fourth installment of $1 billion next month, Pakistan has spent $4 billion so far.
The development came on the heels of Saudi Arabia’s decision to extend another financial bailout to Pakistan to help the nation meet its external financing needs in line with IMF requirements.
Finance Minister Muhammad Aurangzeb said Wednesday that Saudi Arabia has committed $3 billion in additional deposits, with disbursement expected in the coming week. He further stated that the existing $5 billion Saudi deposit would no longer remain subject to the previous annual rollover arrangement and would instead be extended for a longer period.
With the new loan, Saudi Arabia has become the largest single country to have placed a total of $8 billion in cash deposits with the central bank. A $3.5 billion gap has appeared in official gross foreign exchange reserves after the United Arab Emirates failed to transfer its debt despite making commitments to the IMF.
Pakistan expects a total of $5 billion in new financial assistance from friendly countries to maintain reserves at their current level.
Aurangzeb said the government remained committed to maintaining reserves in line with its commitments under the IMF, including the goal of achieving about $18 billion in reserves, equivalent to approximately 3.3 months of import coverage, by the end of the fiscal year.
The Express Pakinomist had first reported in January that the UAE did not give back a year to Pakistan, but at the time the finance minister hoped that the friendly country would soon hand over the debt for a year.
Additional IMF loans
Government sources told The Express Pakinomist that it has been decided to seek an additional loan from the IMF under the existing package and there were high chances that the IMF would honor Pakistan’s request.
The IMF’s managing director has said her organization expected $50 billion in funding requests from member countries to deal with the shock of war in the Middle East.
The sources said IMF managing directors also urged the fund’s management to either expand existing programs or provide new financing windows. They added that it may not be possible to seek a new financing facility from the IMF, but the existing program can be expanded with additional loans.
Pakistan can use up to 600% of its quota in the IMF and so far the country has used up 350% of the total quota. The sources said there was a window of between $2 billion and $2.5 billion available that Pakistan wanted to use to deal with the effects of the Middle East war.
The sources said Pakistan was eligible to avail the additional IMF funding to deal with war shocks. They said there were very high chances that the IMF would accept Pakistan’s request to increase the loan size.
Extending loans to Pakistan to deal with the impact of the war would not be a favor but to support the country to get through the crisis, the sources said.
With a quota of 600%, Pakistan can get a total loan of 16 billion dollars and the country has used up 9.5 billion dollars. This is a strong case for the increase under the existing Extended Fund Facility programme.
Treasury officials said Aurangzeb raised the issue of additional funding with Dan Katz, first deputy managing director of the IMF.
A Treasury handout, issued after the meeting between the IMF Deputy Managing Director and the Treasury Secretary in Washington, stated that Aurangzeb engaged Dan Katz “on program continuity and external shocks”.
The Finance Ministry further stated that Aurangzeb briefed the First Deputy Director General on the immediate impact of the ongoing conflict on Pakistan’s economy, particularly in relation to energy procurement and logistics.
Aurangzeb “briefed IMF management on Pakistan’s ongoing assessment of the second- and third-order effects of the crisis, including implications for inflation, growth, exports and remittances”, according to the release.
The government’s position on the impact of the war has changed, as it had previously told the IMF that its external sector would remain stable despite the war.
The sources said there were two options to either front-load the additional loan from the IMF or give it in tranches.
But the higher exposure to IMF debt would also increase interest rates and surcharges, the sources said. They said Pakistan will have to pay higher interest rates to the IMF to avail the additional facility.
Aurangzeb also raised the issue of higher surcharge on additional loans with the IMF during his ongoing visit. Muhammad Aurangzeb called for an early and substantial review of the IMF allowances, saying that this had significant implications for developing economies.
The sources said the high surcharges can be avoided by convincing the IMF to front-load the extra loan amount instead of shifting it in tranches.
The IMF mission will also arrive in Pakistan in the middle of next month to finalize the new budget, including deliberations on fiscal issues.
