Pakistan-IMF loan talks: SBP asked to increase interest rate
- Forex held by SBP stands at $3.1bn after increase of $276m.
- Pakistani authorities hoping to strike agreement next week.
- Sources say IMF pressing hard on gross forex target.
ISLAMABAD: The International Monetary Fund (IMF) and State Bank of Pakistan (SBP) held a round of talks about the possibility of further tightening of monetary policy and building up foreign exchange reserves for the end of June 2023, The News reported Saturday.
Pakistan’s foreign exchange reserves, held by the SBP, stood at $3.1 billion after it went up by $276 million till February 10, 2023.
This was mainly because of improved liquidity in the market after narrowing down differences between the inter-bank and open markets after allowing adjustments of the exchange rate.
Keeping in view the IMF’s prescriptions to jack up the foreign exchange reserves up to $12 billion till end June 2023, Pakistan will have to secure at least $17-18 billion in four-and-a-half months. It included external debt repayment requirement of $5 billion, financing of current account deficit (CAD) of $3-4 billion and $8-9 billion for building up the foreign exchange reserves till June 30, 2023.
If Pakistan’s wish list is accepted by the IMF, it requires dollar inflows of $11-12 billion for meeting foreign debt servicing, financing of CAD and building up of foreign exchange reserves up to $6-$7 billion by end of June 2023.
The IMF has also asked the SBP for jacking up the policy rate by 300 to 400 basis points in order to move towards the interest rate from a negative to a positive trajectory.
But the SBP officials made it clear that the independent Monetary Policy Committee (MPC) was established under the SBP’s Amendment Act, and the forum was empowered to take a decision keeping in view the macroeconomic fundamentals.
A senior official of the finance ministry told The News on Friday that the Pakistani side was asking the IMF review mission to strike the staff level agreement (SLA) next week before the IMF’s executive board meeting, expected in four to six weeks.
The Pakistani authorities are still hoping for striking a staff-level agreement next week, but a gap still existed on a projection of the external financing front.
One senior official conceded that Pakistan undertook tough and bold decisions by increasing electricity and gas tariffs and slapping Rs170 billion in taxes through a mini-budget. The exchange rate was brought to market-based and the POL [petrol, oil, lubricants] prices surged.
Taking all these steps was in the hands of Pakistani authorities, but now the most critical steps remained unresolved on account of securing confirmation from all multilateral and bilateral creditors for meeting the yawning external financing requirements during the programme period. The IMF programme of EFF would expire on June 30, 2023, and there is no possibility to grant any further extension in it.
“The IMF is pressing hard on gross foreign exchange reserves target up to $11-$12 billion till the end of June 2023. However, the Pakistani side is asking for fixing gross foreign exchange reserves less than double digit in the range of $6 to $8 billion, keeping in view the possibility of reduced confirmation from bilateral partners,” said official sources, who are privy to the developments on the ongoing virtual parleys with the IMF mission for moving towards the signing of staff level agreement.
Both sides have agreed that there was no possibility to touch gross foreign exchange reserves position up to $16.2 billion till the end of June 2023, as sought on the occasion of finalising the 7th and 8th reviews under the $6.5 billion EFF arrangement.
Now the Pakistani side wants a 50% reduction in fixing the target for the end of the program period, but the IMF is insisting on seeking confirmation from all possible avenues.
Finance Minister Ishaq Dar, who is currently visiting Dubai, has been running from pillar to post to seeking confirmation from multilateral, bilateral creditors and commercial banks in order to muster up the required dollar inflows support for securing approval from the IMF for the revival of the stalled programme.
Not consulted on petrol subsidy for low-income groups: IMF
- IMF seeks details on operation, cost, targeting, protections against fraud and abuse, and offsetting measures.
- Govt, a day earlier, had announced subsidy help inflation-hit masses.
- IMF says Islamabad has made “substantial progress” on policy commitments.
The International Monetary Fund (IMF) said that the Pakistani government did not consult the global lender on its petrol subsidy for low-income groups, reported Bloomberg on Tuesday.
Esther Perez, the IMF’s resident representative for Pakistan, told the publication that the lender was not consulted on the government’s plan to raise fuel prices for wealthier motorists to finance a subsidy for lower-income people.
“Fund staff are seeking greater details on the scheme in terms of its operation, cost, targeting, protections against fraud and abuse, and offsetting measures, and will carefully discuss these elements with the authorities,” said Perez.
‘This is not subsidy’
A day earlier, Minister of State for Petroleum Musadik Malik announced that the federal government in order to cushion the effect of high petrol prices on inflation-hit masses decided to subsidise petrol up to Rs100 for motorcyclists and owners of vehicles up to 800cc.
“Prime Minister Shehbaz Sharif has directed to provide subsidy on petrol to low-income people up to Rs100 per litre,” Malik told journalists in Lahore.
Earlier, it was decided to provide a subsidy of Rs50 per litre.
The minister said under a comprehensive strategy, subsidised petrol will be available to motorcyclists and owners of vehicles up to 800cc.
Malik further said owners of vehicles above 800cc would be charged full price.
He said the decision to provide fuel at subsidised rates will be implemented within six weeks, adding that the government will make petrol cheaper for the poor.
“The owners of big vehicles will pay more for petrol. The rich will pay Rs100 more for petrol while the poor will pay Rs100 less. 210 million people are poor in a population of 220 million, we stand with poor Pakistan.”
He said that the decision on the gas tariff has been implemented from January 1. “We have separate tariffs for the poor and the rich.”
Pakistan has made ‘substantial progress’: IMF
On the staff level agreement, the IMF said that Islamabad has made “substantial progress” in meeting the policy commitments required to unlock billions of dollars in loans.
“A staff-level agreement will follow once the few remaining points are closed,” said Perez told Bloomberg.
“Ensuring there is sufficient financing to support the authorities in the implementation of their policy agenda is the paramount priority.”
Last week, Finance Minister Ishaq Dar had said that the global lender wanted to see countries finalise commitments they have promised to help Pakistan shore up its funds before signing off on the bailout package. Pakistan needs to repay about $3 billion of debt by June, while $4 billion is expected to be rolled over.
Pakistan has taken tough measures including increasing taxes and energy prices, and allowing its currency to weaken to restart a $6.5 billion IMF loan package. The funds will offer some relief to a nation still reeling from last year’s devastating floods and help pull the economy out of a crisis ahead of elections this year.
Pakistan-Russia final crude oil import talks start today in Karachi
- PSO has been nominated on behalf of Pakistan for talks.
- Russia’s PSC has been nominated for the talks by Moscow.
- The PSC delegation arrived in Karachi on Monday.
ISLAMABAD: A Russian technical delegation will hold talks today (Tuesday) with Pakistan State Oil (PSO) officials in Karachi, to give final touches to a crude oil import deal at a government-to-government level (GtG), a senior Energy ministry official told The News.
“In case of successful talks, both the state-owned nominated companies will sign the commercial agreement the next day (March 22),” said the official who spoke on the condition of anonymity.
PSO has been nominated as the state-owned company on behalf of Pakistan for talks and signing of the Russian crude oil import deal. The Operational Services Center (PSC), which is a state-owned company of Russia, has been nominated for the talks by Moscow.
The PSC delegation arrived in Karachi on Monday.
Both the PSC and PSO may ink the deal, as the delegation from Moscow will hold talks on March 21-22.
“The current price of Brent crude has come down to $73 per barrel whereas the Russian crude oil price remained at $52 in February 2023, which has further lowered between $42-48 in the international market,” sources within the industry told the publication.
They urged Pakistan refineries to purchase Russian oil on their own in compliance with the G7 countries’ regulations. However, the government is trying to secure a GtG deal below the $60/barrel price cap imposed by G7 countries.
Under the GtG deal, Petroleum Division wants to lock the deal at close to $50/barrel, $10/barrel below the cap price. The G7 countries had imposed a price cap on Russian oil in the wake of the war on Ukraine.
Some official sources say that Russia wants to confirm if Pakistan really wants to purchase its crude as there is no written direction from Pakistan’s top man to purchase the Russian crude. However, Pakistani officials are exploring options to purchase crude from Moscow under the direction of Pakistan’s prime minister.
“So far Russia has not indicated what discount it will offer.”
The Russian side will finalise with PSO all the prerequisites before inking an agreement that includes the mode of payment, shipping cost with premium, and insurance cost. The officials said that Russia’s PSC may offer a discount on the base price in its talks with the PSO’s technical team.
They added that the shipping of crude oil from Russian ports would take 30 days and an additional per barrel transportation cost would be $10-15/barrel.
The government does not want to divulge the mode of payment to Russia against the import of crude oil. However, the authorities are weighing their options to either use Pakistan National Shipping Corporation ships for transporting crude from the Russian port or to use the Russian tankers.
“We also have to keep in mind the landed cost of Russian crude as the crude vessel will arrive in 30 days, owing to which per barrel shipping cost would hover at $10-15,” the official said, adding that Moscow has not agreed on the discount yet. “We fear that the maximum discount would be offset by the shipping cost of the crude oil.”
However, State Minister for Petroleum Musadik Malik in a televised presser said that Pakistan would get a 30% discount on crude oil prices. Malik, while talking on Geo News programme Capital talk last week, said 80-85% of negotiations with Russia were completed.
“Our commercial deal is in the final stages, and by the month of March the entire commercial deal will be negotiated,” he said. “In April, we will give them the first shipping order. The first cargo of crude oil from Russia will arrive in by the end of April,” the state minister said.
The minister revealed that the country would receive one-third of its crude oil imports from Russia at a concessional rate “the impact of which will be translated to the people.”
“The first crude oil vessel from Russia will arrive at the end of next month of April as a test cargo to assess the landed cost of crude as compared to the cargo Pakistan gets from ADNOC and Saudi Aramco. Pakistan has sought a 30% discount in Russian crude base price.”
In case, the test ship’s cost is found low enough to bring down the prices of petroleum products, Pakistan would give a green signal for the import of Russian oil in a month which may be 2-4 cargos.
Since Pakistan is facing a US dollar liquidity crunch, it would pay Russia in the currencies of friendly countries that include China, Saudi Arabia, and UAE. The officials said that the ship carrying Russian crude will have the NICL’s (National Insurance Company Limited) insurance and Pakistan Reinsurance Company Limited (PakRE) will reinsure the asset (ship with crude oil).
The State Bank of Pakistan, which earlier showed hesitance for any transaction with Russian banks keeping in view the G7 regulations and the US and EU countries, has now shown a willingness to talk with the Russian counter bank over a payment mechanism for oil import in three currencies other than dollars.
Banking crisis on cards as Pakistan’s textile sector near brink of default
- APTMA has asked for a Zoom meeting with top functionaries of SBP.
- Commerce ministry says textile industry representatives may hold an urgent meeting SBP officials today.
- APTMA says textile sector already running at less than 50% capacity.
ISLAMABAD: The textile sector has reached the brink of default in the wake of its inability to service the loans it received under TERF (Temporary Economic Refinance Facility) and LTFF (long-term facing facilities) which may also lead to a possible banking crisis, discloses the letter of APTMA to the State Bank of Pakistan written on February 27, 2023.
The State Bank of Pakistan (SBP) during the PTI era provided the TERF and LTFF facilities to help industrialists install more textile units for growth in exports of the country.
However, because of the ongoing LCs crisis, stuck-up consignments of imported cotton at the ports owing to the dollars liquidity crunch and withdrawal of RCET by the government in line with IMF diktat, all the new and expansion units in the sector have become non-functional. This has led to immense pressure on export-reignited units which are unable to generate funds to pay even interest on the loans, leading to massive defaults, curtailment capacity and a possible banking crisis.
The textile industry has asked the SBP to extend the moratorium on debt under TERF and LTFF from June 1, 2023, to December 2023 to avoid large-scale Non-Performing Loans (NPLs) and severe negative impacts on the banking sector.
The APTMA has also asked for a Zoom meeting with top functionaries of the central bank of Pakistan.
Banks are not opening LCs or retiring cotton imports, the letter says, which had led to the non-functioning of the textile units.
“Now loyal international customers are reluctant and asking Pakistani suppliers whether or not they will be able to meet deadlines and ship orders on time resulting in a loss of export orders. The industry is running out of cotton stocks and textile mills have either shut down or will shut down in the very near future if decisive and urgent action is not taken.”
The textile sector also urged the SBP to declare the opening of LCs of cotton imports the status of “Must Open.”
The commerce ministry says that textile industry representatives may hold today (Monday) an urgent meeting with top mandarins of the SBP.
The commerce ministry’s top sources said that the prime minister convened meetings on export sector issues four times but the said meetings couldn’t be held mainly because of the premier’s pressing engagements.
The APTMA also mentioned that the business plan for new industrial units and expansion of the existing units had been carved out based on RCET (Regionally Competitive Energy Tariff) — electricity tariff of Rs19.90 per unit and gas rate at 9 cents per MMBTU.
However, with the withdrawal of RCET, the industry is forced to run on an electricity tariff of 40 per unit owing to which the textile sector has started dying out day by day.
The letter disclosed alarming facts saying that the textile sector is already running at less than 50% capacity. Around 7 million workers in the textile sector and textile-related industry were laid off since last summer and if this sector is closed down it will lead to more layoffs resulting in significant unemployment of more than 10 million workers and further deterioration in the balance of payments in the shape of at least $10 billion exports per annum.
The textile industry also highlighted in its letter the bleak cotton production in the country, saying that the country’s cotton production has declined to a historic low this year dropping to 5 million bales due to heavy rains and floods. The cotton production loss has been worth more than $2 billion.
The textile industry consumes nearly 15 million bales and the current season’s anticipated demand indicates that about 10 million bales will need to be imported. However, banks are not opening LCs for the import of cotton.
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