Pakistan’s financing worries are “exaggerated”, stresses the governor of the central bank

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The governor of Pakistan’s central bank has dismissed market concerns about the deepening liquidity crisis in Islamabad as “overdone” and said he expected the IMF to approve $1.3 billion in new funds for the financially troubled Asian country in August.

Murtaza Syed also told the Financial Times Pakistan is locked in talks with Middle Eastern countries like Saudi Arabia and China “to get some of the extra money we need” as it struggles with rising and falling commodity prices Foreign exchange reserves and a depreciating currency.

“On the external debt service side, while the next 12 months look challenging, they’re not as bad as I think some people are making them out to be,” Syed said. “Especially as we have the backing of the IMF program in what has been a very difficult 12 months globally.”

Sri Lanka’s default on its external debt in May has fueled concerns about the risk of defaults in other emerging markets.

The Pakistani rupee shed more than 7 percent of its value against the US dollar last week, its steepest weekly decline since 1998, following a regional election victory for Imran Khan, who was ousted as prime minister just months ago.

Pakistan’s widening current account deficit has drained its foreign exchange reserves, which have fallen by $7 billion since February to just over $9 billion in July, Syed said, the equivalent of a month and a half of imports.

Fitch Ratings revised its outlook on the country to negative from stable last week, citing a “significant deterioration in Pakistan’s external liquidity position and financing conditions since early 2022”.

But Syed, who worked for the IMF for 16 years, said Pakistan’s debt vulnerability could not be compared to Sri Lanka’s problems. “These fears are exaggerated and in fact Pakistan does not belong to this very bad category of countries,” he said.

Unlike Sri Lanka’s tourism-dependent economy, he said, Pakistan “has had a pretty good Covid” with a milder economic contraction and a stronger recovery than its smaller neighbor.

While Sri Lanka owes about 40 percent of its debt to commercial lenders, most of Pakistan’s debt is owed to multilateral institutions and bilateral lenders, he added.

“We have about $34 billion in external financing needs over the next 12 months and we have already identified over $35 billion in financing because of the IMF program,” he said. “So we’re actually overfunded.”

Syed said he expects the IMF’s next $1.3 billion disbursement from its $7 billion facility to be approved in August, although that could be complicated by the summer holidays. “We’re trying to work towards that sooner rather than later,” he said.

One analyst said that although Sri Lanka’s economic situation is worse than Pakistan’s, political risk in Colombo is diminishing but Islamabad is deteriorating.

“In Sri Lanka the crisis is so immediate and so severe that there is a broad consensus within the political class as to what needs to happen,” said Peter Mumford of the Eurasia Group.

“If Sharif or Khan are prime ministers, there will be differences in fiscal policies that would affect the viability of an IMF program.”

Khan’s disgruntled victory last week in Punjab, the country’s largest province, has increased the likelihood that early general elections could topple Shehbaz Sharif’s government.

However, Syed said his “strong base” is that the Sharif government will remain in power. Even in the “hypothetical” case of early elections, he added, the IMF has had programs with transitional governments in the past.

“I think there is general recognition across the political spectrum that the next 12 months are going to be tough for emerging economies and for Pakistan too,” he said.

Twitter: @JohnReedwrites

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