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The IMF business is also closed. The Service Level Agreement (SLA) has not yet expired. It is very likely that the SLA will take place in the next few days following the completion of certain steps; approval by board, completion of 9th review, and money coming to SBP account. This is needed to bring life to the economy in the default core until June. However, the biggest question is what will happen after May, as the repayments are huge in the next 12-18 months, and that will require another IMF program and a lot more funding from friendly countries. Also, for that political stability is very useful – something that is completely missing in this context.
There are some pending issues with the IMF. One is financial need. Some sources are saying that the SBP has sent these recommendations to the IMF, and the Fund has not accepted them. There are chances that the IMF will agree to those recommendations. However, some of that money needs to be in the country by the time the council meeting takes place.
Another issue is the money. It is a top issue and SBP has to close the gap between interbank and open market before the IMF mission can come to Pakistan last month. Even after that, the IMF is not convinced that the money is based on the market. It appears that they need some kind of proof that the SBP will not intervene. Disbelief is only growing.
Bankers are of the view that there is no intervention by SBP, given the dynamics of flows. However, the flows are very controlled, because the import restrictions are not yet relaxed. Their removal is a condition of the IMF. However, imports cannot be fully opened until the reserves are increased. But eventually these have to open up, and once that happens, some streams will be consumed in it. And that takes the total budget request up to $2 billion higher than the Treasury Department’s recommendations. And the IMF really wants to know how much total fiscal demand is.
Then the interest rates will go up as well. SBP expects this year’s inflation to be around 27-29 percent while the policy rate is 20 percent. The SBP in its last policy statement has indicated that the hike of 300 bps rate has pushed interest rates into positive territory on a forward looking basis. However, the vibrations are that we need more tightening; Another 1-2 percent increase cannot be ruled out by the next policy review on April 4 and maybe that is a forecast for the IMF board meeting as well.
The bottom line is that even with the SLA and the successful council meeting for the 9th review, the country’s macro concerns are far from over. These negotiations provide breathing space until June; and without SLA, death (default) is immediate. The real question is what will happen after May. Back of the envelope estimates suggest that the country needs a cushion of up to $20 billion over the next two years to get out of the crisis, avoid debt restructuring and move on to growth after 2 years. Otherwise, you can still take the path that Sri Lanka received in the last 12-18 months, which will be very painful – much more than the pain the country is in today.
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