Contrary to the euphoria of building sufficient foreign currency reserves, a draft report of World Bank Group (WBG) says that Pakistan requires at least one and half years more to gain minimum creditworthiness, necessary to qualify for $2 billion in policy loans.
Although, the international lender will approve $11 billion worth five-year Country Partnership Strategy including $2 billion of policy loans on Thursday, the disbursements of policy loans will start only after “Pakistan regains minimum creditworthiness”. The WBG has defined the minimum creditworthiness as “foreign currency reserves equal to at least three months of next year’s imports of goods and services and a stable or declining government debt to GDP ratio”.
“It is not expected that these criteria will be met for at least 18 months and when International Bank for Reconstruction and Development lending resumes, it would be limited to $500 million per year or $2 billion in total over CPS period,” according to the draft report.
Another condition that the draft report attaches with continuation of the policy loans, if it is restored, is the continuation of International Monetary Fund’s (IMF) three-year $6.7 billion programme. The World Bank would suspend its policy support to Pakistan the day IMF programme is suspended, states the draft report.
After dropping to dangerously low levels of $2.8 billion, the country’s official foreign currency reserves have increased to about $7 billion on the back of $1.5 billion Saudi Arabia assistance, something that the former Prime Minister Chaudhry Shujaat Hussain described it as ‘charity’. The foreign currency reserves also increased $2 billion due to the floating Euro bonds.
Finance Minister Ishaq Dar has recently vowed that his government would further increase reserves to $15 billion, including $4.7 billion held by commercial banks, by September and hoped that the WB will also relax its conditions of reserves sufficient to back three months import bill to two and half months. Dar is taking into account private reserves, which the international lenders do not consider as official reserves.
The draft report also underlines risks that could lead to the suspension of the IMF programme. The reports says negative external shocks, such as a fall in remittances, a slow recovery of foreign direct investment and external inflows, terms of trade shock, a severe drop in external demand for Pakistani exports, or a major natural disaster might undermine growth and reform momentum. “This in turn could lead to the suspension of the IMF Programme”.
The draft report further states that “if reforms are not maintained, including a possible suspension of the IMF Program, the World Bank could not continue to extend policy support.”
To mitigate the damage the WBG has sought prior to the implementation of reforms. “The World Bank is putting its whole force behind the reforms, but Pakistan has a history of starting strong and finishing weak”, said the report.
According to sources, reforms in taxation, power sector, privatisation and autonomy to State Bank of Pakistan will be the determining factors in continuation of the IMF programme.
The draft report also noted that slow progress on reforms may set back CPS objective of increased private sector participation. The private sector investment and FDI flows might not pick up as expected in the event of greater uncertainty due to increased political and security risks in Pakistan, it stated. The private sector may also be affected by lack of progress in the areas of privatisation, tax simplification, enhancement of investment climate, and market-based energy tariffs, such as power and gas, it added.
Pakistan’s weak implementation capacity, coupled with risks of disasters and increased violence could derail achievement of results, according to the report. It added changing environment or renewed conflict in Afghanistan could bring more stress on Pakistan’s economy and country’s ability to pursue reforms.