Import cover shrinks to 1.8 months as forex reserves decline

KARACHI: Pakistan’s depleting foreign reserves brought the country’s import cover down to 1.8 months and the country may soon need to seek $10 to 15 billion of bailout package from the International Monetary Fund (IMF), analysts said on Friday.“Looking at history, it looks like Pakistan usually rushes to IMF when the forex reserves fall below 2 months of goods imports,” Executive Director - Research at Insight Securities Zeeshan Afzal said in an economic outlook. “Currently, the country has 1.8 months of import cover, and the finance managers have started hinting at possible negotiation with the IMF.”The country’s foreign exchange reserves fell 3.3 percent to $16.243 billion during the week ended June 22.Afzal expected the country to back to its usual lender of last resort for up to $15 billion bailout package, “which would also bring more loans flows from other lenders”.“However, the bailout would be contingent upon very strong commitment to reforms as under normal course IMF lends up to 435 percent of country quota,” he said.“Pakistan has utilised 216 percent while the remaining limit means $6.3 billion of more loans.”The analyst said the country needs to raise $38 billion in the next two years, as compared to $16.1 billion external loans of FY2018, to repay about $20 billion of principal and to improve the import cover back to above four months. “As a result, Pakistan’s foreign debt burden would increase by $18 billion i.e. 6 percent of GDP.”Afzal said if the country fails to meet its financing gap or IMF denies bailout “we expect steeper interest rates hike (entering in double digit territory), sharper depreciation (over 10 percent) and sudden drop in GDP growth which would eventually reduce the CA (current account deficit)”.“However, we attach low probability to that event. Though gross loan of $38 billion in two year is huge but net country debt liability (after repayment of the maturing debt) would increase by $11.4 billion in FY2019 and $6.7 billion in FY2020 versus $8.6 billion in FY2018.”

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