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 State Oil Co. warrants closer watch

Pakistan’s largest oil marketing company, Pakistan State Oil Company (PSO) is expected to suffer from increased circular debt build up during FY23 amidst volatile LNG prices due to current geopolitical scenario, alongside with rapid depreciation of Pak Rupee, in the near term. I am inclined to share with my readers the latest review by Pakistan’s largest brokerage house, AKD Securities.

The brokerage house after revisiting its investment case for Pakistan State Oil (PSO) has revised December 2023 share target price to PKR215, from PKR240, providing a total return of 66% from last close.

Its models incorporate risk-free rate of 17%, PKR/US$ of 240/270 and Arab Light of US$95/90 per barrel during FY23/FY24. More specifically, with the crop season likely to be impacted by the recent catastrophic floods (affecting HSD offtakes), reduced auto sales in the coming quarters and overall fallen retail sales due to lower affordability amidst higher prices.

Industry’s total POL demand is expected to cumulatively fall by 15% during FY23 (previous estimate 8%), due to an overall depressed economic outlook.

To note, PSO’s volumetric offtakes were down by 18%YoY as against industry’s overall decline of 20% during 5MFY23.

The much awaited revision in OMC margin provides significant impetus to the valuation. The brokerage house has incorporated uniform OMC margins of PKR6/liter for both MS and HSD from January 2023 onwards, up 61%/51% from current levels for MS/HSD, respectively.

The aforementioned increase is expected to result in gross margins for retail fuels to stand at 2.6%/2.5% (assuming current POL prices) from 1.6%/1.7% on MS/HSD, respectively.

Historically, OMC margin increases were done generally benchmarking with the core CPI (NFNE), increasing by 6% on an average, annually. Going forward, the brokerage house assumes an annualized growth in OMC margin by 8%, to be revised at the start of every fiscal year.

With regards to the company’s working capital issues, measures taken by the GoP in order to meet with conditions set out by the IMF may be a breath of fresh air for the company.

As the global lender pushes the GoP into fiscal consolidation by increasing power and natural gas tariffs, this is expected to reduce the financial burden on the cash-starved sector and consequently PSO.

The company may be the primary beneficiary of these hikes as repayments of its overdue receivables and LPS surcharges may begin flowing through from its two biggest defaulters SNGPL (overdue receivables: PKR305 billion) and power sector (overdue receivables: PKR92 billion) as per latest quarter, inducing increased collections from customers.

Ongoing winters may pose  risk because in the near term, the national petroleum company is expected to suffer from increased circular debt build up during FY23 amidst volatile LNG prices due to current geo-political scenario, along with rapid depreciation of PKR/US$.

This subsequently results in increased working capital needs for the company and finance costs (82% short term in foreign currency, rising rates globally pose a risk).

Overall, the brokerage house expects belligerent build up of LNG receivables from Sui companies (as seen in the past) to gradually slowdown/ halt on the back of shrinking tariff differential between indigenous and imported gas assuming biannual gas price increase is incorporated in timely manner going forward.

The brokerage house liking for Pakistan State Oil (PSO) is due to: 1) gas and power tariff adjustments may prove to be cash-positive, 2) Modernization plans in refinery subsidiary (PRL) to enhance productivity, and 3) Phasing out of RFO coupled with increasing share of retail fuels, resulting in stable margins to drive unhampered future cash flow.

State Bank of Pakistan raises policy rate to 15%

State Bank of Pakistan (SBP) in its Monetary Policy Statement (MPS) has increased policy rate by 125bps to 13-year high of 15%.

As per SBP, inflation expectations have risen significantly due to local and international challenges. Inflation in June 2022 rose to a 14-year high of 21.3% as government removed energy subsidies.

Furthermore, external account concerns also increased as current account deficit was reported at US$1.4 billion in May 2022 which was higher than expected. As a result, foreign exchange reserves and rupee has remained under pressure further increasing inflation expectation.

SBP stressed the importance of monetary tightening and its impact on containing aggregate demand. Had the monetary tightening measures not been taken by the central bank, inflationary pressures and external account issues could have further worsened.

SBP also stressed the need to provide targeted subsidies where inflationary pressures and impact of higher utility prices must be absorbed by well-off segment of the society.  

The interest rates on LTFF and EFF loans are now being linked to the policy rate to strengthen monetary policy transmission, while continuing to incentivize exports by presently offering a discount of 500bps relative to the policy rate as per SBP. It is believe that the hike was in line with IMF’s key demand to reduce concessions given to industry and improve monetary policy transmission.    

SBP expects inflation to remain in the range of 18-20% in FY23. It is anticipated to fall in the range of the 5-7% target range by the end of FY24, driven by tight policies, normalization of global commodity prices, and beneficial base effects. GDP growth rate is likely to remain in range of 3-4% in FY23. SBP anticipates Current Account Deficit at 3% of GDP in FY23. 

Despite the impact of tight fiscal and monetary policy on demand-pull inflation, inflation is likely to remain elevated around current levels for much of FY23 due to the large supply shock associated with the reversal of fuel and electricity subsidies.

SBP is likely to continue to monitor developments and factors affecting medium term prospects for inflation, fiscal stability and growth. SBP is anticipated to take appropriate action to safeguard them.

SBP expects Pakistan to reach Staff Level agreement with IMF very soon as government has already taken the difficult decisions like reversal of petroleum subsidies and passage of budget in line with key objectives agreed with IMF.

Completion of the on-going IMF review will also catalyze additional funding which should help Pakistan meeting its external financing requirements. 

Both monetary and fiscal policies are now moving in same direction which should help address inflationary pressures going forward.

SBP has refrained from giving forward guidance recently due to a lot of uncertainty as SBP’s policy decisions will remain data driven.

Though, inflationary pressures are cost push in nature but monetary tightening helps contain core inflation which is also rising and needs to be contained as per SBP.