Pakistan: Takeaways from central bank briefing after 300bps hike in interest rate

The State Bank of Pakistan (SBP) on Thursday increased the benchmark policy rate by 300bps to 20%. It noted that the recent fiscal adjustments (mini-budget) and exchange rate depreciation have significantly deteriorated near-term inflation outlook. The SBP also revised its headline inflation target for FY23 to 27-29%.

It was highlighted that despite the drastic decline in current account deficit (CAD) in 7MFY23, upcoming debt repayments and a decline in financial inflows continue to exert pressure on foreign reserves and the exchange rate.

The recent fiscal adjustments i.e. hike in GST and FED, reduction in subsidies are expected to help contain the otherwise widening fiscal and primary deficits.

It is believed that after the interest rate hike decision, real interest rates have been pushed into positive territory on a forward-looking basis. This will help anchor inflation expectations and steer inflation to the medium-term target of 5 – 7% by end FY25.

The central bank also arranged a briefing and the takeaways are:

Of the US$23 billion in expected principal repayments at the start of FY23, about US$15.8 billion has been settled by: USD$9.8 billion repayments and US$6 billion rolled-over. Remaining US$7.2 Billion includes US$3 billion which is expected to be rolled-over also and US$4.3 billion, of which US$1.3 billion would be re-financed. Hence, US$ 2.9 billion in repayments are required over April-June 2023.

Pakistan has no intention of restructuring Eurobonds as all commitments are expected to be met on time with the next repayment tranche of US$1 billion due next year. Similarly, most of the external debt pertains to bilateral and multilateral borrowing which can be rolled-over. A small portion relates to commercial bank loans and the Government is already in contact with bilateral partners to secure further support.

Overall, inflationary pressures remain high across all groups following recent fiscal adjustments and depreciation of PKR. The rise in core inflation is much sharper compared to the previous episode. In particular, services core inflation (excluding house rent and transportation) has risen more sharply.

Global economic prospects have improved slightly with international commodity prices seem to be peaking. Accordingly, export values have come down. However, import volumes have fallen drastically. Pakistan’s CAD has also improved, but official FX reserves cover is still much below the adequate level. Nevertheless, the reserves position is expected to improve following conclusion of the 9th EFF review.

Demand compression measures include ongoing monetary tightening and fiscal adjustments coupled with PKR depreciation, are bringing down economic growth momentum towards sustainable levels. This is evident from the moderation seen in high frequency growth indictors, broader decline in LSMI and fall in private sector borrowing.

There have been no demands from the IMF to implement a ‘border exchange rate’. However, the IMF has recommended narrowing the difference between the inter-bank and open-market PKR/USD rates.

Current amount of outstanding OMO injections is PKR 6.5 Trillion. Its main objective is to keep short-term interest rates aligned with the policy rate.

 

Where is Pakistan heading? Revival or Devastation

In an attempt to get the IMF tranche of around US$1.2 billion released, the Government of Pakistan has imposed new taxes amounting to PKR170 billion, increased electricity and get tariffs and withdrawn certain subsidies. Added to this is persistent hike in interest rate as a measure to curb inflation. Today, the State Bank of Pakistan is scheduled to announce another hike of 200 bps on the recommendation of IMF. I am of the view that all these measures will fuel the inflation already hovering around 30% and further erode the competitiveness of Pakistani manufacturers and in no way help the country overcome Balance of payment crisis. This will necessitate Pakistan to negotiate yet another program with the lender of last resort on even more stringent conditions. I seek comments from my LinkedIn friends.

Israel: Police throws stun grenades at protesters

Israeli Police officers threw stun grenades into a crowd of protesters on Ayalon Highway in Tel Aviv early on Wednesday afternoon in an effort to disperse the protests and clear the highway.

According to The Jerusalem Post, one of the protesters was injured after a stun grenade hit him on the side of his head. According to the source, he was evacuated from the scene for medical treatment, and there is a concern that he may have lost his ear.

Protest organizers criticized the police dispersal methods, calling the system morally bankrupt and accused them of becoming a political police force.

"The commissioner should fire those responsible for the failure today," the statement read. "Throwing grenades and trampling protesters for democracy with horses is crossing the black line. Shame on the state of Israel.

"We must stop the coup d'état because if the laws of the dictatorship are passed, the violence against demonstrators will be a matter of routine, if it will be possible to demonstrate at all."

An unnamed apache pilot in reserve IDF services and now an El Al pilot, was arrested at the protests at the Kfar Hayarok junction near Ramat Hasharon. According to him and eyewitnesses, he was there as part of the demonstrations to photograph the event and had not acted out when he was taken forcefully by the police.

Israel's "national day of disruption" kicked off early on Wednesday morning as protesters demonstrated at the entrance to Jerusalem in the middle of Highway 1 shortly before 8 a.m., preventing traffic from moving.

Police were said to be working at the scene to redirect traffic and restore order and the road was reopened to traffic at 8:20 a.m.

The nationwide protests were scheduled to be held as the government's legislative committee votes to pass the second part of the judicial reform which includes the override clause that allows the government to override High Court of Justice rulings with a Knesset majority of 61 MKs.

Following a situational assessment between National Security Minister Itamar Ben-Gvir, Police Chief Kobi Shabtai and the Jerusalem and Tel Aviv district commander and deputy commander, Ben-Gvir issued a statement against the move by protesters to close roads. 

"The blocking of central roads must not be allowed, and all of the anarchists' blockades must be opened," he said. "I am in favor of democratic protest, but we will not allow civil riots and we will not allow anarchists to block major roads."

He added that he had informed police across the country to reopen roads if they are blocked by protests.

Opposition leader Yair Lapid responded to Ben-Gvir via Twitter, "The minister of TikTok and pita is confused again. The only anarchy is that of the most insane government in Israel's history.

"The demonstrators this morning are patriots and lovers of Israel who want to keep it democratic and free."

Elsewhere in the country, protesters attempted to disrupt the arrival and departure of trains at the Tel Aviv Hagana train station.

"Over the last hour, there have been a number of intentional disruptions to the closing of the doors on some trains when they stop at stations, and as a result, the trains are delayed and there are disruptions to movement and travel," Israel Railways said in a statement. "We ask all passengers to allow safe and regular journeys to continue."

Later on Wednesday morning, Ayalon Highway in Tel Aviv was closed to traffic as protesters began to block the road.

Coalition MKs and ministers were quick to criticize the actions taken, with Minister in the Welfare and Social Affairs Ministry Yoav Ben-Tzur (Shas) tweeting, "We must not allow law-breaking anarchists to shut down the country by blocking main roads and preventing citizens from getting to where they want to go. This is not a protest; this is a violation of the law."

"We must not allow law-breaking anarchists to shut down the country by blocking main roads and preventing citizens from getting to where they want to go. This is not a protest, this is a violation of the law."

UAE-India hold talks to finalize rupee dirham trade deal

The United Arab Emirates (UAE) and India are in technical discussions to finalize rupee-dirham exchange rate for trade arrangement. This was told by UAE ambassador to India, Abdulnasser Jamal Alshaali to Hindustan Times newspaper. 

“The technical conversation is ongoing. There has been an agreement to settle a certain [amount] of trade between the two countries, just not having to go through a third currency,” he said, adding the two sides are working on a remittance facility to make it "more direct and easier".

Alshaali noted that energy security is important for both countries with the UAE seeking to be part of India’s energy security.

“The fact that the strategic oil reserve has been agreed on and it’s been established and has been ongoing for quite some time, it is quite helpful and constructive, especially given the current state of affairs,” he added.

The ambassador said that India is a reliable partner for the UAE’s food security.

“Food security is important for us. We don’t produce that much food and we import a lot of it. And it’s quite vital for us that we have a partner that we can rely on, and India is a reliable partner when it comes to that,” Alshaali noted.

 

India leads world in cutting internet access for 5th year in a row

India imposed by far the highest number of internet shutdowns in the world in 2022, internet advocacy watchdog Access Now said on Tuesday, as the country topped the list for the fifth successive year.

Out of 187 internet shutdowns globally recorded by Access Now, 84 took place in India, including 49 in Indian- administered Kashmir, the New York-based digital rights advocacy group said in a report published on Tuesday.

"Authorities disrupted internet access at least 49 times in Kashmir due to political instability and violence, including a string of 16 back-to-back orders for three-day-long curfew-style shutdowns in January and February 2022," the watchdog report added.

Kashmir has long been a flashpoint between India and archrival Pakistan, which claim the region in full but rule only parts.

In August 2019, the Hindu nationalist Bharatiya Janata Party government led by Prime Minister Narendra Modi scrapped the autonomy of the Muslim-majority state of Jammu and Kashmir, splitting it into two federally administered territories.

The government has since regularly imposed communications restrictions on the region on security grounds, which rights groups have condemned and described as measures to quash dissent.

Militants have battled India's rule in Kashmir for more than three decades. The South Asian country blames Pakistan for stoking the revolt. Islamabad denies the claims.

Although India once again led the world in internet shutdowns, 2022 marked the first time since 2017 that there were fewer than 100 shutdowns in the country, the watchdog said.

Ukraine was second on the list, with the Russian military cutting access to the internet at least 22 times after Russia invaded Ukraine on February 24 last year.

"During Russia's full-scale invasion of Ukraine, the Russian military cut internet access at least 22 times, engaging in cyberattacks and deliberately destroying telecommunications infrastructure," the watchdog said in its report.

Ukraine was followed on the list by Iran where authorities imposed 18 internet shutdowns in 2022 in response to demonstrations against the government.

Nationwide anti-government protests erupted in Iran last fall after the death of 22-year-old Kurdish Iranian woman Mahsa Amini in police custody on September 16, last year. Amini was arrested in Tehran by the morality police for flouting the hijab rules, which require women to entirely cover their hair and bodies. She died while in custody.

 

Pakistan: Monetary Policy or Mockery

State Bank of Pakistan (SBP) was scheduled to announce Monetary Policy on March 16, 2023. However, on February 28, the central bank announced to hold meeting of Monetary Policy Committee on March 02. The central bank is likely to hike the interest rate by 200 to 300 bps.

While this may have surprised some people, many say it was much anticipated. They say since SBP and Finance Ministry plan to hold a big auction on March 08, 2023. The Banks faced a few challenges, worst being lack of clarity on the interest rate.

It was feared that if the Monetary Policy is not announced before the auction, the banks will participate at much higher than the previous cutoff levels.

If the Banks participate at or around the previous cutoff levels and the SBP raises interest rates higher than the market expectations of 200bps, the carry on the T-bills will be negative as SBP will have to hold OMO at higher levels.

It appears that the Government of Pakistan is adamant at rising interest to curb inflation as per IMF mantra. However, it is necessary to say that after the proposed hike the paying interest rate for the GoP on its borrowing would become unsustainable, inflation would spike to new highs and businesses would witness further erosion in their competitiveness – leading to further fall in exports.

It is also necessary to reiterate that the steps being taken on the behest of IMF would take Pakistan closer to default. One wonders, why the present economic managers have not been able to come up with their homegrown plan to pull Pakistan out of the current malice.

Failure on the part of economic managers to tax the rich, as advised by the chief of IMF, suggests that the rulers wish to prolong their ‘honeymoon’ and let the Pakistanis face all the adversaries.

 

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Pakistan: What should be the facets of New Refining Policy?

There can’t be two opinions about need for boosting crude oil refining capacity in Pakistan. However, analysts are of the consensus that the issue is complicated, policy makers and players are not on the same page, presence of pressure groups and above all there is an acute shortage of foreign exchange. As a result announcement of new Refining Policy has been lingering on, eroding paltry foreign exchange reserves of the country.

Lately, the government has asked local refineries to overcome the likely shortfall of 8,000 tons of petrol in the country. This clearly indicates that the concerned departments were unaware of the factors responsible for the shortfall: 1) delay in opening of L/Cs due to the limited availability of the foreign exchange and 2) overflowing furnace oil storage tanks of the refineries.

The government has been emphasizing local refineries to further up-grade their plants for producing Euro-V specification fuels and minimizing production of furnace oil, however it requires capital investment of around US$5 billion.

Analysts also say that for up-gradation of refineries that included setting up of Diesel HydroDesulfurization (DHDs) to reduce Sulphur from diesel and isomerization plants for enhancing the production of Motor Spirit (Petrol).

This would require refineries to arrange funding from either their own resources and or borrowing from lenders at commercial terms. To obtain the required funding, refineries will have to improve their balance sheet, according to sources. 

At present 8 refineries are operating in the country which have not been able to perform well. These refineries have not been able to utilize full capacity mainly due to low margins, liquidity issues, low fuel grade, low domestic crude oil production and high cost of production.

The aggregate installed capacity of the refining sector is around 22 million tons per year. In 2021 these refineries refined around 12 million tons, which puts capacity utilization around t 55%.          

Mainly these refineries produce Motor Sprit, Kerosene, HSD and Furnace oil. They also produce HOBC, LDO, Aviation Fuels, Naphtha, Refinery Gas, LPG, Lube-Oil, Asphaly, Wax, Sulphur and various other non-energy products. 

Furnace oil is being produced in large quantities. However, due to it being a high cost source for power generation its consumption has gone down drastically which has piled up its inventories as exporting furnace oil has been a challenge for the refineries. 

Sector experts suggest that the upcoming refining policy must incentivize existing players to upgrade their facilities to allow them to produce international quality standard products in turn opening up avenues for exports. This will also reduce furnace oil production which will increase profitability of the whole sector due to high margins of MS and HSD. 

It seems that policy planers are keen in the creation of new refinery that will require approximately US$15 billion. However, sponsors demand more incentives that would put the existing refineries at a disadvantage.

Refineries are regulated by Oil & Gas Regulatory Authority (OGRA) under Pakistan Oil (Refining, Blending, Transportation, Storage and Marketing) Rules, 2016. Setting up an oil refinery is a highly capital-intensive Project. Going for a secondhand refinery is a not advisable as a refinery comprises of extensive net of pipelines and once refinery shuts down than for long (other than a planned yearly shut down) most of the pipelines are required to be replaced.

The Country can learn from the experience of Cynergico (BYCO) in this regard. The unit even after 8 years of its implementation is the least efficient among all refineries in Pakistan.

The way forward is that the GoP should come up a short term policy that will cover debottlenecking of processes and Balancing, Modernization & Reconstruction (BMR) of existing refineries to make them more efficient in terms of capacity utilization.

The product composition of Refineries should be such that the Country will be importing cheaper products (like crude oil and furnace oil) and producing more of expensive products (like Motor spirit and high speed diesel.

Long term plan comprises of construction of at least one Refinery in next five years with a minimum refining capacity of 50,000 barrel/day extendable to 100,000 barrel/per day in 10 years.

The field of energy and petroleum is highly specialized, and its policy makers should also be properly educated, knowledgeable and experienced to judge the implications of any Policy Review.

The problem is that Ministry of Energy & Petroleum comprises of decision makers who cannot grasp the whole implications because they are more trained in management than the business.

This weakness pushes them to call for advice from consultants on every implication which may spread into various sub implications. The Opinion of each consultant may vary from each other so much that the decision makers try to just pass the time instead of taking a decision.

The same phenomena are with the cabinets and their heads who understand least of the sector and often failed to defend a decision as they can’t comprehend the implication of a policy review at decision time, nor any body give them confidence over a decision.

The multinationals, international suppliers/ traders and local operators engaged in the country in selling of energy / petroleum do also take the advantage of ignorance of decision makers at Ministry and Cabinet level and try to influence the decisions to their own respective advantage. During the process the country suffers and the custodian of country benefits has least of required knowledge.