Pakistan’s reserve’s worsening; is IMF bail out package necessary?

GVS asked an economic guru about Pakistan’s biggest concerns next year and how likely was the scenario of Pakistan going to IMF.

Pakistan reserves

The first and foremost issue is we are heading into heavy weather in terms of our balance of payments position. Import growth is strong. Exports are picking up but are relatively muted. There are some large external payment liabilities over the next year.

All in all, the major worry is that the current account deficit will balloon to a level where we may require financing from the IMF. That’s the major challenge. Over the next year, it’s over 85% probability that we’ll need to go to the IMF.

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The massive current account deficit is a result of the major misalignment of the exchange rate from its fundamental rate since December 2013.

So, this is a very large misalignment and a very protracted one. This has an impact on both making imports cheaper and exports more expensive.

The current period is similar to 2008 where we saw a large devaluation because the reserves were running out. So, either the IMF will force us towards devaluation or the markets will; because the foreign exchange reserves have run down.

Mr. Sakib Sherani currently manages his consultancy firm, Macro Economic Insights (Pvt) Ltd, based in Islamabad. He was a former Economic Advisor to the Ministry of Finance, Pakistan. 

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