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More than four weeks have passed since the IMF staff finished their technical discussions for the upcoming 9th review. Still, the staff level agreement (SLA) has not yet been reached. The markets are worried because of the delay. Firstly, the technical talks which were delayed by more than three months earlier, which were supposed to start in October 2022, were finally completed in the second week of February 2023, and now it is the middle of the month March, yet there is no SLA.
The economy has been on a ventilator of sorts since then. Imports are being restricted to manage a low level of SBP reserves with the threat of an economic deficit looming. One by one, industries are shutting down or winding back operations as they cannot import raw materials. In the process, unemployment is on the rise and growth is on the wane while there is no respite from all-time record-setting inflation.
The question is whether the Fund believes that any of the key pieces of the puzzle are still missing. There are three elements pending, and there is a good chance that these will be resolved soon, and the SLA will take place this week alone. First, the Fund needs to check whether the exchange rate is market based or not. The second is the cabinet approval for power tariff revision, and the third and the most essential element is the validation of the financing guarantee provided by SBP from bilateral partner countries. If pieces fall into place which is likely, the SLA will also happen. And then that funding has to be in the SBP account before the board meeting. First, it can happen in May.
The issue with the currency is very important to the Fund. Since the imports are limited, the currency is essentially not market based. In fact, SBP buys dollars from the market; but the catch is in micromanaging imports. It is very difficult for the IMF to assess the implied intervention; one gauge of market value is the open market rate. The gap between the banks and the open market must be zeroed. And SBP has to announce a clear plan to open imports.
As for the gross funding, there is a gap of two billion dollars in the current account deficit where the IMF counts the backlog that the government has not yet agreed with. Now, that seems to have been resolved and the total funding requirement is $4.5 billion including WB and ADB. From this, the SBP has sent some financial assurances to the IMF and the Fund is trying to verify. That also leads to the SLA. The amount may be $2 billion for Saudi Arabia and $1 billion for the United Arab Emirates. Here, some of the confirmation is yet to come.
Moreover, the flows have to be poured in before the approval of the board. This includes parts of a deferred oil facility and other transfers. A fund wants the reserves to build up. These flows remain critical, as do the other funding arrangements. Fingers crossed.
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