State of Pakistan Economy

Pakistan’s macroeconomic conditions improved, according to the State of Pakistan’s Economy Report for the H1FY24 released today by the State Bank of Pakistan (SBP). The Report contains the analysis prepared on data outturns for the July-December FY24. According to the Report, the real economic activities moderately recovered against the contraction last year, while Stand-By Arrangement (SBA) with the IMF helped reduce stress on external account.

Meanwhile, current account deficit narrowed considerably, amid continued contractionary monetary and fiscal policies, better agriculture produce and ease in global commodity prices. On fiscal side, primary balance posted a higher surplus during H1FY24 compared to H1FY23 on account of strong growth in both tax and non-tax revenues that outpaced increase in non-interest expenditure. Despite restrained domestic demand, inflationary pressures remained persistent at elevated levels, the Report noted.

The real GDP, driven by agriculture sector, grew by 1.7 percent in H1FY24. The recovery in agriculture sector also supported some of the agro-based industries. In addition, withdrawal of import prioritization measures improved availability of raw materials for industry, the report said. The approval of the IMF’s SBA eased external borrowing constraints, leading to an increase in financial inflows during H1FY24. In addition, lower scheduled external loan repayments compared to H1-FY23 and significant reduction in current account deficit, on account of decline in imports as well as upsurge in exports supported the build-up in SBP’s FX reserves.

Despite subdued domestic demand and decline in global commodity prices, states the Report, a combination of lingering structural issues, PKR depreciation compared to H1-FY23, increase in government spending, and supply shocks kept the National CPI (NCPI) inflation at elevated levels. A number of factors including higher input costs, increase in indirect taxes, and implementation of upward revision in minimum wage announced in the FY24 budget, alongside the second-round effects of administered prices of food and energy items, were responsible for the persistence in the core inflation during H1-FY24.

The Report highlights that despite some improvement in macroeconomic indicators, economy continues to grapple with the structural bottlenecks. The major issues include limited savings, low investments in physical and human capital, weak productivity, stagnant exports, narrow tax base, and inefficiencies in PSEs. Additionally, political uncertainty exacerbates the situation through inconsistency in economic policies, weak governance and public administration, hindering investment and thus economic development. These underscore the need for policy reforms to ensure sustainable development over the medium to long-term.

The Report includes a Special Chapter that analyzes long-term trends in inflation and its determinants in Pakistan. The chapter also sheds light on policy and structural factors influencing inflation including monetary policy framework, fiscal and debt policy, trade openness, agricultural efficiency, productivity and demographic trends. The chapter concludes that reducing political and policy uncertainties and more fiscal consolidation can help bring inflation down at a faster pace in the short run. The chapter also emphasizes on addressing longstanding structural issues to achieve low and stable inflation over the medium term, without overburdening monetary policy and the consequent high economic costs.

The Report expects continuation of modest economic recovery in the second half of FY24. In the backdrop of improvements in business confidence, high frequency demand indicators since November 2023, and prospects for a good wheat production during FY24, the SBP projects real GDP growth in the range of 2 – 3 percent for FY24. The NCPI inflation, on the other hand, is expected to remain downward trajectory despite uncertainties persisting in both domestic economy and international commodity market.

Keeping these developments in view, the SBP projects the average NCPI inflation in the range of 23 – 25 percent for FY24, lower than 29.2 percent in FY23, and is expected to come down to 5 – 7 percent range by September 2025. On external account, the CAD is projected to remain lower than earlier estimates, amid slightly improved global outlook and domestic growth prospects to boost foreign exchange earnings from exports and remittances.

The SBP projects the current account deficit in the range of 0.5 – 1.5 percent of GDP for FY24. This macroeconomic outlook remains susceptible to escalating geopolitical tensions, unfavorable weather conditions, adverse movements in global oil prices, and subsequent external account pressures. Further adjustments in energy prices and fiscal consolidation -warranted for slowing the pace of debt accumulation - may also weigh on economic activities and inflation.

Pakistan Stock Exchange index up 2.5%WoW

The week ended on July 27, 2023 continued its bullish run at Pakistan Stock Exchange (PSX). The benchmark index started the week at 45,920.73 points, remained on upward trajectory and closed at 47,076.99 points, gaining 1,156.26 points or 2.5%WoW. Investors’ sentiments remained positive after the approval of the IMF Standby Agreement for US$3 billion and expectations that the general elections would be held in time.

Average daily traded volume was reported 125.64 million shares as compared to 325.12 million shares a week ago, down by 61.4%.

The PKR parity appreciated to PKR286.45 to a US$.

Results announcements for the period ended June 30, 2023 continued during the week. Several companies posted results below past performances mainly owing to the lingering global and local economic headwinds resulting in record high interest rates, deteriorating exchange rate, imposition of super tax, amongst other reasons.

Monetary policy announcement is scheduled for July 31, with market consensus remaining at a 100bps hike.

In other positive news, 5 state owned enterprises (SOEs) have signed  MoUs to finance their 30% portion in the development of a Greenfield refinery project with Saudi Aramco, and establishment of a Sovereign Wealth Fund worth PKR2.3 trillion by including 7 SOEs (where UAE has shown interest in acquiring shares) to fund capital investments. Abu Dhabi Investment Authority has provided technical assistance to finalize the law.

Other news for the week were: 1) global crude oil remained higher owing to production cuts amidst sluggish demand from China, 2) Pakistan scheduled to repay US$2.44 billion during July; 3) an electricity tariff hike for PKR7.50 per unit announced, barring consumers using up to 200 units and partial subsidy for consumers up to 300 units; 4) prolonged wet spell threatens cotton crop output; 5) POL products worth US$1.182 billion imported on deferred payment basis from Saudi Arabia; 6) Petroleum dealers margins increase by PKR1.64 per liter; 7) US FED announced rate interest rate hike by 0.25bps.

Flow-wise, major selling was recorded by Mutual Funds with a net sell of US$5.98 million. Other Organization absorbed most of the selling with a net buy of US$5.22 million.

Top performing scrips during the week were: HGFA, AICL, HBL, NBP, and SHEL, while top laggards included: SML, BNWM, DAWH, MUGHAL, and ENGRO.

In brokers’ opinion, the market shall maintain it’s positive uptick owing to news relating to Chinese loans rollovers, fresh funding from GCC and other bilateral allies, chances of political stability post general elections towards the end of the year and a possible re-entry into a bigger IMF program to address any lingering default concerns.

However, it is imperative to see which direction the policy rate goes in the July 31, announcement, which will further determine market sentiments.

Brokers reiterate their stance to follow a cautious approach while taking new positions and we continue to advocate dollar-denominated revenue stream scrips (Technology and E&P sector) to hedge against currency risk or high dividend yielding scrips.