ISLAMABAD: As the arrival of $2.1 billion Chinese loans jacked up Pakistan’s total foreign exchange reserves to $17.58bn — highest since April 2018 — the government is expecting finalisation of a bailout package with the International Monetary Fund (IMF) in four-six weeks to form the basis for next year budget.

IMF’s new mission chief for Pakistan Ernesto Ramirez Rigo is set to touch base with Finance Minister Asad Umar and senior officials of his ministry on Tuesday over authorities’ preparedness to enter into a three-year programme. Assisted by IMF’s country representative Maria Teresa Daban, Mr Rigo will also visit Karachi the following day for interactions at the State Bank of Pakistan (SBP).

During the two-day discussions, both sides are expected to set dates to field a formal mission by the middle of next month to finalise a reform package, a senior official told Dawn.

Officials said that before the mission chief’s visit, a team of IMF’s representative office in Islamabad had been engaged with finance ministry’s authorities for the last couple of days on actionable issues. The two sides are of the shared opinion that most of the policy initiatives should become part of the coming budget to sail through the parliamentary approval as part of the money bill 2019-20 for implementation at the start of the next fiscal year.

$2.1bn Chinese inflows increase forex reserves to $17.58bn

Informed sources said this was considered crucial to effective implementation of the reform agenda before the government descended into popular mode. “First two budgets are most important for any difficult reform to succeed and the conclusion of first fiscal year is already upon us and the third budget would be too close to election cycle,” they said.

At the heart of most crucial policy action is the power sector where the relevant authorities have yet to come up with a plan to address circular debt that now stands at over Rs1.6 trillion, the sources said.

The finance ministry has clearly told the power division to finalise a plan over the next two weeks with prior warning that it would not get more than Rs120bn tariff differential subsidy budgeted this year. This would remain frozen at this level over the next couple of years to achieve automatic reduction in subsidy-to-GDP ratio as the size of the economy goes up.

The officials said the full cost of recovery was difficult to materialise in the first year but 20-30pc increase in tariff in the first year was unavoidable to ensure a sustainable deficit. The government also has to pass on the impact of about Rs200bn in capacity payments to consumers over the next couple of months.

On top of that, gas tariff will also be increased by 15-22pc notwithstanding gas companies’ demand for up to 145pc increase.

The sources said the SBP was still opposed to a complete free float of the rupee, but the government believed that the market-based exchange rate regime could gradually take place. They said Pakistan had taken a series of policy actions since November last year when talks with the IMF mission were suspended and the Fund had softened in stance. For example, the improvement in current account is greater than the IMF expectations as Islamabad now expects current account deficit of about $12bn, significantly lower than previous estimates of $16-17bn. The exchange rate has also reached closer to its real effective rate as remittances and exports have improved and imports gone down.

“Implementation of a successful strategy has ensured total reserves of the country rising to a comfortable level of $17.58bn,” finance ministry’s spokesman Dr Khaqan H. Najeeb said on Monday after “deposits of RMB 15bn equivalent to $2.1bn received in SBP account”.

He said the foreign exchange reserves held by the central bank had hit a double-digit mark of $10.67bn. The net reserves held by commercial banks stood at $6.91bn. He said the government’s successful multi-pronged strategy to ensure stability in balance of payments, including curtailing current account, improving remittances and ensuring adequate foreign exchange financing, helped increase the reserves to comfortable level.

Earlier, talking to reporters, Finance Minister Asad Umar said Pakistan had come closer to reaching an agreement with the IMF as the differences had reduced over a possible bailout package. He said Pakistan had not changed its stance in talks with the IMF but the Fund had revised its position and the gap between the two sides had reduced.

Responding to a question, he said gas and electricity prices would increase gradually as subsidies were withdrawn. The withdrawal of subsidies would not happen at once, he added. He confirmed that the new IMF mission chief would be in Pakistan on March 26 for an introductory visit.

Published in Dawn, March 26th, 2019