Pakistan Ready to Part Ways With IMF

Citing significant improvements in Pakistan's current account balance, Pakistan's Finance Minister Dr Abdul Hafeez Shaikh has said that his government would not waste its energy on reviving the currently suspended IMF program that began in 2008, or seek a new IMF bailout, according to a report in Pakistan's Dawn newspaper.

Pakistan's decision follows the latest State Bank report of a current account surplus equivalent to 604 Million USD in the second quarter of 2011.

The surplus is the result of rising exports from Pakistan and growing remittances from Pakistani diaspora, the 7th largest in the world.

Pakistan's exports in the first two months of the current fiscal year (2011-12) surged by 20.26 percent over the corresponding period of last year. Exports during July-August (2011-12) were $4,167 million as compared to the exports of 3,465 million during July- August (2010-11, according to a GeoTV report citing data from Federal Bureau of Statistics (FBS).

According to official data as reported by Reuters, remittances rose 40.45 percent to $1.31 billion in August 2011, compared with $933.06 million in the same period last year.

Pakistan has about $18 billion in foreign exchange reserves, according to Dawn News. It's about 6 months worth of imports at the current rate.

Currency traders reacted negatively to the government's decision to part ways with the IMF as the Pakistani rupee hit its second record low against the dollar in two days on Friday, touching 87.92 before firming to 87.75/78 at the close.

Some analysts believe that the timing of the decision to free itself from the IMF is motivated by the ruling party's desire for more spending on populist programs to impress its voters before the coming elections. This is likely to make the budget deficits worse in the absence of IMF's demands for reforms to cut spending and raise revenues to narrow Pakistan's budget deficits to 4.5% of GDP.

Related Links:

Haq's Musings

Pakistani Diaspora Among the World's Largest

Pakistan's Rising Exports and Remittances

Pakistan Car Sales Up 61%

Pakistan to Swallow IMF's Bitter Medicine

IMF and Pakistan- A Case Study

Pakistan's Economic Performance 2008-2010


Riaz Haq said…
Inflation slowing in Pakistan, reports Businessweek:

Oct. 3 (Bloomberg) -- Pakistan’s inflation slowed for a second straight month in September, giving policy makers more scope to cut interest rates to bolster economic growth.

Consumer prices rose 10.46 percent from a year earlier, after climbing 11.56 percent in August, the Federal Bureau of Statistics said in Islamabad today. The median of six estimates in a Bloomberg News survey was for a 10.65 percent gain. The bureau in August changed the base year for inflation to 2008 from 2001.

Pakistan’s central bank unexpectedly cut rates in its most recent policy decision on July 30, breaking away from Asian neighbors such as India and Malaysia that have increased borrowing costs or kept them steady in recent months to tame inflation. Growing public debt and living costs have fanned Pakistan’s 10-year government bond yields to the highest level after Greece and Venezuela, according to data compiled by Bloomberg.

“The biggest contributor to the slowing inflation rate is the relative stability in food prices,” Khalid Iqbal Siddiqui, head of research at Invest & Finance Securities Ltd. in Karachi, said before the report. “I am expecting a 100 basis-point cut in rates in the next meeting.”

The State Bank of Pakistan reduced the discount rate in July to 13.5 percent from 14 percent. The central bank’s next monetary policy announcement is scheduled for Oct. 8, and three of five economists surveyed by Bloomberg News predict the rate will be lowered to 12.5 percent. The other two expect a 50 basis-point cut to 13 percent.

Government borrowing for budgetary support rose 23 percent to 224 billion rupees ($2.56 billion) in the fiscal year starting July 1 from a year earlier, according to data on the State Bank of Pakistan’s website. The government announced this year that it plans to maintain zero net borrowing from the central bank to contain inflation, one of the highest in Asia.

The International Monetary Fund forecasts Pakistan’s economy will expand 2.56 percent in 2011, the slowest pace since the 1.72 percent growth in 2009.
Riaz Haq said…
S&P to maintain Pakistan's B- rating, reports Bloomberg:

Oct. 31 (Bloomberg) -- Pakistan will be able to maintain an adequate level of foreign-exchange reserves because of funds provided by donor countries, Standard & Poor’s said as it affirmed the South Asian nation’s credit rating.

“We expect donor commitments will ensure at least an adequate level of external liquidity in the next two years,” S&P said in an e-mailed statement today. The rating company maintained its B- foreign- and local-currency rating for Pakistan. The rating is six levels below investment grade.

The stable rating outlook “balances adequate external liquidity against vulnerability stemming from ongoing structural fiscal weaknesses and significant political and security risk,” S&P said. The International Monetary Fund in May 2010 suspended disbursements to Pakistan after the country failed to meet conditions such as reducing the budget deficit that were attached to a $11.3 billion loan.

Pakistan didn’t seek a new program after the previous one expired on Sept. 30.

Pakistan’s foreign-exchange reserves stood at $17.2 billion as of Oct. 27, compared with a record $18.3 billion at the end of July, according to the central bank.

While the “current level of external liquidity is likely to diminish somewhat” after the expiry of the IMF loan program, the pledge by donor nations will help boost Pakistan’s “external liquidity,” S&P said.

Pakistan’s high public and external indebtedness and sectarian strife are preventing S&P from upgrading Pakistan’s credit rating, according to the statement.

“The weak revenue performance also poses a direct constraint on monetary policy effectiveness, as the government is compelled to resort to borrowing from the central bank for deficit financing,” the statement showed.

Policy makers aim to boost Pakistan’s economic growth to 4.2 percent in the fiscal year through June from 2.4 percent in the previous year.

Terror attacks in the South Asian nation have killed at least 35,000 people since 2006, according to government estimates.
Riaz Haq said…
World Bank’s new estimates released on Thursday placed Pakistan among top 10 recipients of remittances among developing countries, fetching $12 billion this year, reports Dawn:

India leads with $58 billion followed by China at $57 billion, Mexico $24 billion and the Philippines $23 billion.

Bangladesh follows Pakistan with $12 billion, Nigeria 11 billion, Vietnam $9 billion and Egypt and Lebanon $8 billion each.

Remittance costs have fallen steadily from 8.8 per cent in 2008 to 7.3 per cent in the third quarter of 2011.

The ‘Outlook for Remittance Flow 2012-14’ shows that the officially recorded remittance flows to developing countries are estimated to have reached $351 billion in 2011, up 8 per cent over 2010.

Worldwide remittance flows, including those to high-income countries, reached $406 billion in 2011 and are expected to rise to $515 billion by 2014.

There are several sources of vulnerability to forecasts for remittances to developing countries.

The ongoing debt crisis in Europe and high unemployment rates in high-income OECD countries are adversely affecting economic and employment prospects of migrants.

These persistently high unemployment rates have created political pressures to reduce current levels of immigration.

There are risks that if the European crisis deepens, immigration controls in these countries could become even tighter.

This would affect remittance flows to all regions – especially to countries in Eastern Europe and Central Asia.

The World Bank report says that high oil prices, which have hovered over $100 a barrel in recent months, continue to provide a much-needed cushion for migrant employment in, and remittance flows from, the Gulf Cooperation Countries (GCC) and Russia. Oil driven economic activities and increased spending on infrastructure development are making these countries attractive for migrants from developing countries.

Remittances from the GCC countries to Bangladesh and Pakistan where the GCC countries account for 60 per cent or more of overall remittance inflows grew by 8 per cent and 31 per cent, respectively in the first three quarters of 2011 on a year-on-year basis.

The Pakistan Remittance Initiative (PRI), a joint initiative of the central bank and Pakistan’s government, has been working actively with commercial banks and money transfer operators to lower the cost of inward remittances and improve the payments systems and delivery channels in order to bring a larger share of remittances into formal channels.

The indigenisation programmes being considered or implemented in the GCC countries like the ‘Nitaqat’ programme in Saudi Arabia have raised concerns of adverse implications for future remittances to the Philippines, Pakistan, Bangladesh and other migrant-sending countries, it says.

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