Politics

Pakistan’s IMF Program May Come With Rupee Depreciation

pakistan imf program
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Pakistan is prepared to formally submit its application for assistance from the International Monetary Fund on Friday. Pakistan’s IMF program is expected to bring with it a lot of consequences for the nation’s citizens in the form of tax increases to boost the government’s budget.

What to expect from Pakistan’s IMF program

In a note this week, Credit Suisse analysts Farhan Rizvi and Fahd Niaz predicted that Pakistan’s IMF program would include a three-year Extended Fund Facility in the range of US$6 billion to $8 billion. News outlets now put that number in the range of US$7 billion to $8 billion. More final details on Pakistan’s request are expected to be released on Friday.

The CS team added that the Fund was targeting Rs5,400 billion in tax collections for fiscal 2020, representing a 38% increase from the Rs3,900 billion estimated for fiscal 2019. The IMF also wants to set a plan to introduce a Value-Added Tax to replace the Goods and Services Tax.

Like in previous bailouts, Pakistan’s IMF program this time around is expected to include quarterly targets aimed at slashing government borrowings from the central bank. The goal will be to build up foreign currency reserves via purchases in the open market. According to Credit Suisse, Pakistan’s reserves currently sit around US$8.8 billion, which is approximately two months of import cover.

Fixing the budget

Pakistan’s IMF program is also expected to bring a 20% to 25% increase in electricity tariffs for the nation’s citizens. The Credit Suisse team expects a road map for circular debt curtailment and notes that the IMF wants Pakistan’s utility regulatory body, NEPRA, to be fully independent.

They also note that the Pakistani government’s future budget is expected to be focused on generating revenue. Officials want to have the federal budget for fiscal 2020 ready on May 24. They’re expected withdraw about Rs350 billion in exemptions, amounting to 0.9% of GDP. They also expect the government to implement a tax amnesty scheme which will expire before the IMF program begins, but they expect limited success from this due to “the lackluster response to previous schemes.”

Currency depreciation expected

Under the new State Bank of Pakistan governor, Rizvi and Niaz expect more proactiveness and predict a policy rate hike of 50 basis points this month, which would bring the rate to 11.25%. They note that the recent treasury bill auction showed cutoff yields at 11.24%, which is a leading indicator of sentiment on the nation’s money market.

They also expect an adjustment to the Pakistani rupee’s valuation, noting that the last real effective exchange rate reading indicates a 4% overvaluation. Additionally, they said the recent strength of the U.S. dollar versus a basket of currencies may offer grounds for the Pakistani central bank to complete another round of currency depreciation of about 4% to 5%. The IMF has said again that it wants a flexible regime for the exchange rate, they noted.

Market valuations of Pakistani companies have de-rated already to about 6.1 times forward P/E, but once Pakistan’s IMF program begins, the CS team believes additional downside should be limited.