SHOULD PAKISTAN TURN TO IMF?

IMPLICATIONS OF DOWNGRADING!

AMANULLAH BASHAR
Oct 13 - 19, 2008

The International Credit Rating companies continued to have a negative look at Pakistan's economy which is quite visible from downgrading of the country from B to CCC .plus However, despite facing the stress factor, there is little probability of Pakistan defaulting. The recent US$500million disbursement from ADB, encouraging statements from the World Bank, and the formation of the Friends of Pakistan consortium led by G-7, China and Middle-Eastern countries will at least help Pakistan to honor upcoming debt obligations and the balance of payment financing crisis.

IMPLICATIONS OF DOWN GRADING?

A rating downgrade reduces the country's ability to tap money through remittance securitization bonds, slowing down the rate of foreign investment and privatization. This could further raise concerns over external vulnerability and prompt polarization and speculation in the foreign exchange market. Consequently, a weakened confidence of the investors likely to continue due to volatile global commodity prices, uncertainty on foreign and credit flows and the worsening law and order situation in Northern border areas of the country.

STRONGER ECONOMIES TO DOMINATE WEAK NATIONS!

In fact, it is game of nerves and to have some courage to tackle the job confidently, otherwise international forces of vested interest are always there to take advantage of weaker economies. Commenting on the prevailing financial turmoil, former Malaysian Prime Minister, Dr Mahathir Mohamad had warned that powerful nations had been presented an opportunity with the current financial problems to force open the economies of East Asian developing countries and possibly dominate them. He mentioned in particular that IMF conditions would include policy changes to enable large foreign banks to take over the financial sector.

IMF & ASIA

During the Asian Financial Crisis in 1997, the South Korean government denied it would go to the IMF for assistance however in a very short span of time the South Korean government finally put forward an official request to the IMF for a US$20bn bailout package. Initially, it turned to the US for help, but, as with Thailand and Indonesia, Washington steered South Korea to the IMF. South Korea then turned to Japan, which also gave it the cold shoulder.

As far as Pakistan government was concerned, it has not yet put forward any proposal seeking financial assistance from IMF as it is endeavoring to raise funds from G-7 and friendly countries. Despite phenomenal financial crisis persisting across the world, there were some exceptional economies like China, Iran and other gulf countries which if pursued can lend a strong supporting hand to bail out Pakistan from hot waters. One thing of supreme importance and imperative to get adequate relief is however lies in credibility of the policies of the government on sound footings.

PAKISTAN

In Pakistan, people generally are not in favor of IMF assistance mainly due to its harsh conditionality which forces heavy bearings on the economics of the common people on the back of structural reforms. However, those who are in favor of country's re-entry into the IMF program plead that IMF program has always been at the acme of economic difficulty and subsequent easing of macro pressure and concerns on liquidity/funding sources have lent the stock market stability.

The IMF supporters feel that IMF programs have brought stability to Pakistan's stock-market performance and currency volatility and helped improve worsening credit ratings.

If Pakistan opts for the IMF the current issues like weak external position driving fears of debt default, currency devaluation, stock-market meltdown and a rating downgrade should reverse.

The government is however denying that it is seeking IMF assistance, and is hoping to raise money from G-7 and friendly countries. It is however feared that in case the friendly countries lent a cold shoulder that would be leaving no other option but to approach the IMF? Let us see how the new team of economic and financial managers faces the challenges?

IMPACT ON CAPITAL MARKET

According to Merrill Lynch's assessment of the current situation, the low liquidity, concerns on default and heightened risk aversion have lowered the relative attractiveness of equity as an asset management in Pakistan. It may be recalled that in 1998, country's credit rating had witnessed the downgrading at CCC that was even lower than current CCC+ while the KSE trailing P/E made a low of 5.1x relative to the current market multiple of 7.4x. It is important to note that Pakistan's all time low P/E was 4.1 in 2001 after 9/11 the attacks (credit rating than was B-). The second lowest P/E multiple was 5.2x in 1998. As a result of external vulnerability equity prices would continue to incorporate a higher degree of risk aversion. The key difference between late 90's and now is the composition of index, which is heavily skewed toward commodity price defensive energy names, implying that the market may not slide to all-time low multiples.

EXCHANGE COMPANIES

Meanwhile The Exchange Companies Association of Pakistan, while commenting on the shaky confidence of the investors has said that the fear that financial crisis of the West will spill over to Pakistan has led to speculative buying of the US dollar and withdrawals from the banks. This fear is unfounded and unrealistic as the banking system is on sound footing and there is no liquidity crunch in the country.

In order to meet the demand of the customers the central bank has offered out right sale of the US dollar to all exchange companies with out any restriction of amount. The exchange companies without any exception has obtained US dollar in millions from the State Bank of Pakistan. Hence there is no dearth or shortage of foreign currency in the market. Speculative buyers will not be benefited by their purchases as the rates of US dollar are not going to escalate.

PAKISTAN'S LIQUID FOREIGN RESERVES POSITION

The total liquid foreign reserves held by the country stood at $ 8,321.6 million on 4th October, 2008. The break-up of the foreign reserves position is as under: -

i) Foreign reserves held by the State Bank of Pakistan:

$ 4,866.2 million.

ii) Net foreign reserves held by banks (other than SBP):

$ 3,455.4 million

iii) Total liquid foreign reserves:

$ 8,321.6 million