IMF talks under way for next review

The International Monetary Fund (IMF) is in talks with Pakistani authorities for the next review under its ongoing programme that would comprehensively assess recent economic trends and emerging risks facing Pakistan.

This was stated by the IMF Communications Director Julie Kozack in a press briefing in Washington DC.

She cautioned that evolving global developments — particularly in the Middle East — could weigh on the country’s fragile economic outlook.

She added that discussions would focus on all developments that may affect Pakistan’s economy, including the situation in the Middle East, the increase in oil prices, increase in fertiliser prices, all of the different parts of the economic impact, including tightening of financial conditions, how all of that may affect Pakistan, “and we’ll hear from the team as those discussions come to a conclusion.”

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Kozack further said that IMF sees the conflict in the Middle East as creating new risks for the region, notably commodity price channels with increases in oil and gas prices, increases in fertiliser prices, and potential increases in food prices. Some countries in the region are heavily reliant on imports. That means that their import costs are going to go up, and it may place pressure on their balance of payments. And for countries that are commodity exporters, the balance of payments will benefit from the higher prices in terms of more foreign currency inflows into the country through higher export prices, she further contended.

Kozack said: “we have already seen significant disruptions. The closure of the Strait of Hormuz has cut off access to roughly 20 percent of the world’s oil and seaborne LNG supplies. Energy infrastructure in the Gulf Region and Iran has been damaged, and this has disrupted oil and gas production. So now, when we think about the channels through which these disruptions can affect the global economy, regional economies, and individual economies.”

She itemised three major risks including (i) the impact on commodity prices is going to be determined by how long the Strait of Hormuz is closed and the extent of damage to regional hydrocarbon production facilities. In addition, fertiliser shipments have been disrupted. Transportation disruptions raise risks that could see increases in food prices. And those could be substantial, again depending on the duration and intensity of the conflict; (ii) inflation and inflation expectations, which Central Banks would be keeping an eye on and a broad rule of thumb is that for every 10 percent increase in the oil price, if it were to persist, say throughout the rest of this year, this could lead to a 40 basis point increase in global headline inflation and a fall in global output of between 0.1 and 0.2 percent; and (iii) global stock prices have declined, and bond yields have increased across a range of countries, including in advanced economies like the US, the UK, and Europe, but also in emerging and developing countries. Volatility has increased.

Responding to a question on Gulf Cooperation Countries (GCC), Kozach said: “our preliminary assessment is that growth is expected to weaken, and fiscal and external imbalances will be affected. And for some countries, it depends very much on where the country is and the country’s ability to resume exports.”

In terms of the impact on financial conditions and markets, the impact would be on equity markets, which have declined, and increasing bond spreads in GCC countries.