Is IMF responsible for all the miseries being faced by Pakistan?

I am amused as well as dismayed after reading statement of Shehbaz Sharif regarding ongoing Pakistan-IMF negotiations.  He was quoted by Dawn saying, IMF was giving a very tough time to Finance Minister Ishaq Dar and his team.

It will not be wrong to say that not only the ruling elites fail to pay attention to what the IMF is saying, but also fail to understand the gravity of the situation.

At times, the utterings of the members of incumbent government tantamount to maligning IMF for being responsible for all the miseries being faced by Pakistan.

The general perception being created by the ruling junta that IMF is giving tough time to Pakistan is totally incorrect. To be honest, the negotiating team has failed in coming up with its ‘home grown plan’ to overcome the present malice.

As a result, IMF has shared its plan, to which the incumbent is more than willing, so that it could put all the blame for Pakistan’s the miseries on the IMF.

I have often said that overcoming current account deficit and budget deficit is far easier than overcoming the trust deficit being faced by the present government of Pakistan.

It seems that the present government is in a hurry to get the IMF tranche released so that it could continue its extravaganzas.

It is being feared that the present government is consenting to all the IMF conditions without having the slightest realization that debt servicing will not be possible for the next government.

 

Pakistan Stock Exchange benchmark index posts 1.74%WoW increase

Pakistan Stock Exchange witnessed an overall volatile week as the political instability raged on, dampening investors’ confidence. Participation in the market remained lackluster, with daily trading volume averaging 240 million shares. The benchmark Index gained 716 points during the week ending November 04 2022, depicting a 1.74%WoW rise in the index.

The PKR continued to lose value against the US$, depreciating by 0.25% over the course of the period. CPI once again came in higher on Wednesday, rising to 26.56%YoY for October 2022 as spikes from the unwinding of relief from fuel tariff adjustments and rising food prices impacted. Trade deficit for October 2022 was reported at US$2.3 billion, down 42%YoY. Foreign exchange reserves held by SBP were reported at US$8.9 billion on October 28, 2022.

On the international front, US FED increased its rates by 75bps on Thursday, which pushed the oil
back, as the global commodity continued to rage upwards due to lower than expected US inventory data and reports of Chinese pullback on COVID curbs.

Other major news flows during the week were: 1) Prime Minister Shehbaz Sharif on Monday announced Rs1,800 billion relief package for farmers, 2) PM arrived in Beijing on Tuesday to meet Chinese leaders and discuss plans for the China Pakistan Economic Corridor (CPEC), 3) The country's power sector's circular debt is reportedly touching PKR2.6 trillion mark at present as against PKR2.252 trillion at the end of last financial year, 4) Former Prime Minister Imran Khan was shot in the shin on Thursday when his anti-government protest convoy came under attack in the east of the country in what his aides said was a clear assassination attempt.

Company-wise, amongst main boards, BNWM, TRG and SNGP companies were amongst the top performers. AICL, NESTLE and IGIHL were amongst the worst performers.

Flow wise, substantial net selling was recorded by Insurance companies and Mutual funds totaling US$4.63 million. Individuals absorbed most of the selling with a net buy of US$4.68 million.

Top performing sectors were: Wollen, Tobacco, OMCs, Tech & Communication and Sugar, while laggards included: Vanaspati, Food & personal care, Leasing, Investment Banks/Investment Companies and Commercial Banks.

The market is expected to remain range-bound in the near future, as pressure on the PKR continues to be a cause of concern. The long march, and the ensuing political uncertainty, is expected to keep market movement in check. Moreover, the economic slowdown in the country, an intended outcome of the SBP's contractionary policies and the adverse effects of the floods are likely to keep corporate earnings subdued going forward. Analysts advise investors to remain cautious while building new positions.

State Bank of Pakistan raises policy rate by 100bps

On Tuesday, the Monetary Policy Committee (MPC) of State Bank of Pakistan (SBP) decided to raise the policy rate by 100 basis points to 9.75%. The goal of this decision is to counter inflationary pressures and ensure sustainable growth.

Since the last meeting on November 19, 2021, indicators of activity have remained robust, while inflation and the trade deficit have risen further due to both high global prices and domestic economic growth. In November, headline inflation increased to 11.5%YoY.

Core inflation in urban and rural areas also rose to 7.6 and 8.2 percent, respectively, reflecting domestic demand growth. On the external side, despite record exports, high global commodity prices contributed to a significant increase in the import bill. As a result, November trade deficit rose to US$5 billion.

The MPC noted that recent data releases confirm that the emphasis of monetary policy on moderating inflation and the current account deficit remains appropriate. Following Tuesday’s rate increase and given the current outlook for the economy, and in particular for inflation and the current account, the MPC felt that the end goal of mildly positive real interest rates on a forward-looking basis was now close to being achieved. Looking ahead, the MPC expects monetary policy settings to remain broadly unchanged in the near-term. The MPC key trends and prospects in the real, external and fiscal sectors and the resulting outlook for monetary conditions and inflation continue to upset.

Real sector

High-frequency indicators of domestic demand released since the last meeting, including electricity generation, cement dispatches, and sales of fast-moving consumer goods and petroleum products, and continued strength in imports and tax revenues suggest that economic growth remains robust. The outlook for agriculture continues to be strong, supported by better seed availability and an expected increase in the area under wheat cultivation. Meanwhile, robust growth in sales tax on services also suggests that the tertiary sector is recovering well. While some activity indicators are moderating on a sequential basis, partly as a result of recent policy actions to restrain domestic demand, growth this fiscal year is expected to be close to the upper end of the forecast range of 4 to 5 percent. The emergence of the new Coronavirus variant, Omicron, poses some concerns, but at this stage there is limited information about its severity. The MPC noted that Pakistan had successfully coped with multiple waves of the virus, which supported a positive outlook for the economy.

External sector

Despite strong exports and remittances, the current account deficit has increased sharply this year due to a rise in imports, and recent outturns have been higher than expected. Imports rose to US$32.9 billion during July-November period of FY22 as compared to US$19.5 billion during the same period last year. Around 70% of this increase in imports stems from the sharp rise in global commodity prices, while the rest is attributable to stronger domestic demand. Due to the higher recent outturns, the current account deficit is projected at around 4% of GDP, somewhat higher than earlier projected. In the near term, monthly current account and trade deficit figures are likely to remain high, but expected to gradually moderate in the second half of FY22 as global prices normalize with the easing of supply disruptions and tightening of monetary policy by major central banks. In addition, recent policy actions to moderate domestic demand―including policy rate hikes and curbs on consumer finance―and proposed fiscal measures should help moderate growth in import volumes through the rest of the year.

The MPC emphasized that the monetary policy response to arrest the deterioration in the current account deficit has been timely. Together with the natural moderating influence of the flexible and market-determined exchange rate, the MPC felt that the response would help achieve the goal of a sustainable current account deficit this fiscal year. Moreover, the MPC noted that the current account deficit is expected to be fully financed from external inflows. As a result, foreign exchange reserves should remain at adequate levels through the rest of the fiscal year and resume their growth trajectory as global commodity prices ease and import demand moderates.

Fiscal sector

During July-November FY22 period, revenue growth has been strong, driven by a broad-based and above-target increase in FBR tax collections. However, lower petroleum development levy (PDL) collection led to a decline in non-tax revenues. On the expenditure side, development spending and subsidies and grants have increased significantly during this period. The government intends to introduce legislation to increase revenues through elimination of certain tax exemptions and reduce current and development expenditures. These measures would help moderate domestic demand, improve the current account outlook, and complement recent monetary policy actions.

Monetary and inflation outlook

Since the last meeting, despite a moderation in consumer loans, overall credit growth has remained supportive of growth. Meanwhile, across all tenors, secondary market yields, benchmark rates and cut-off rates in the government’s auctions have risen significantly. The MPC noted that this increase appeared unwarranted.

The momentum in inflation has continued since the last MPC meeting, as reflected in a significant increase in both headline and core inflation in November. Due to recent higher than expected outturns, SBP expects inflation to average 9 – 11 percent this fiscal year. The pick-up in inflation has been broad-based, with electricity charges, motor fuel, house rent, milk and vegetable ghee among the largest contributors. On a sequential basis, inflation rose 3 percent (MoM) in November. Looking ahead, based on this momentum and the expected path of energy tariffs, inflation is likely to remain within the revised forecast range for the remainder of the fiscal year. Subsequently, as global commodity prices retrench, administered price increases dissipate, and the impact of demand-moderating policies materializes, inflation is expected to decline toward the medium-term target range of 5 to 7 percent during FY23. The MPC will continue to carefully monitor developments affecting medium-term prospects for inflation, financial stability and growth.

 

Pakistan reduces interest rate by 25 basis points

On 21st May 2016 State Bank of Pakistan (SBP) issued Monetary Policy Statement for next two months. It has attracted mixed reaction, some term it too little and too late, while many term it a surprising move. However, a few term it an anticipated move and the evidence was rejection of all the bids received in the recent auction of Pakistan Investment Bonds (PIBs).

Many of the financial sector experts were under the impression that in May the SBP would increase the policy rate. This mindset was evident in PIB auction and SBP stance demonstrated though rejection of all the bids. However, one completely fails to understand the logic behind 25 basis point reduction. If the PML-N government is serious in boosting GDP growth rate, it has to reduce the policy rate minimum by 100 basis points.     

It is pertinent to note that SBP last cut the rates by 50bps in September 2015 and since then it has been maintaining status quo in subsequent announcement. SBP forecasts headline inflation (CPI) to remain within targets for the CY16 and going into CY17 to gain upward momentum. However, missed GDP growth target of 5.5% remained major concern and rate cut is expected to help spur growth.

Even though the inflation has been on the rise for past 7 months, SBP expected the outlook to remain low for CY16. However, with rising oil and commodities prices and expected imposition of certain tax measures by the Government in upcoming budget the SBP forecast the inflation to gain upward momentum in CY17. 

Large Scale manufacturing (LSM), mainly supported by construction and consumer durables, automobiles, fertilizers, and cement production, grew 4.7% in the July-March CY16 compared to 2.8% a year ago. The growth is expected to gain further on the back of improved electricity and security situation, according to SBP.

SBP also noted stability in balance of payments and upward trajectory in foreign exchange reserves on account of healthy workers’ remittances and lower international oil prices to keep the situation within manageable levels. Furthermore, SBP remained optimistic on external front, likely on account of continued workers’ remittances and bilateral inflows owing to various projects under CPEC.

Equity markets in general would perceive 25bps cut optimistic as it inflates the valuation especially for highly leveraged companies and sectors. Analysts maintain their likeness for cement, fertilizer, textile and other manufacturing base sectors which would remain in limelight going forward. Margins for banking sector are likely to shrink further thus putting banks under pressure. However, their profitability is likely to remain intact due to revaluation gains in PIB's portfolio.

Some market analysts see room for further reduction of rates, to spur growth. However, many expect SBP to keep rates on hold in near future, owing to rising inflation. A marginal upward move in inflation figures in upcoming months would be in line with SBP estimates. However if those numbers inflate somehow, SBP will have to revisit its rates policy sooner than later.