July 19, 2023 (MLN): With the IMF board meeting done and dusted with and the 9-month program chopped off, the Pakistani populace is in a mood to rejoice and celebrate the success.
Cautious euphoric sessions have been witnessed both on the stock market and in the exchange rate area. The International players have taken a more positive view of the post-signoff situation resulting in the credit spreads shrinking over the last few days.
As with every news, this media is filled with rumors of how it will bode for Pakistan. Various lists of deliverables are being circulated, with bets being placed on whether we as a nation would falter on our deliverables or emerge as a successful nation.
The current economic and financial deliverables around broadening the tax base, performing on the planned budget, expense control in an election period, exchange controls, relaxation of trade, and commitments from friendly countries; seem daunting tasks to deliver.
On the economic indicators front, the bet is one-sided with differing opinions on the quantum of positivity that the IMF signoff would bring. In the stock market, the bet is on the speed and quantum of recovery in the stock market Index.
For elections, the questions being asked are on the timeline of elections. There seems to be a strong faith that the stock market would stage a recovery and also that the election would be held sooner rather than later.
The exchange rate remains an area where the rumors have been for potential rate movements on both sides of the pendulum. From the current rate of ~280, there has been a strong case made for PKR gaining ground towards the 250 level primarily based on REER and positive political and economic sentiments.
Similarly, analysts have been predicting a move towards the 320 -350 range based on our external commitment and the upcoming change in command at the helm of countries' financial affairs as the assemblies complete their tenure.
On the REER front, what needs to be remembered by the financial community is an index that is based on 2014/2015 numbers as the base year. With the changing landscape, this benchmark may not be relevant anymore.
Trading partners have changed, economic fundamentals have evolved and the financial situation has transitioned post-Covid era. There may be an urgent need to relook at the base year and do a revision in the base area keeping in mind the evolving local and global dynamics.
Certainly, an agreement with IMF is a reason to rejoice. Clarity from the apex lender on their support to Pakistan should bring in support from the international financial community.
This helps clear the mist for the path ahead but still, it is no reason to party as the work has been cut out for the country. The path ahead is rocky with plentiful potholes which we as a country need to fill and that too very quickly. We will dissect some of the potholes to see how deep they are but the road is bumpy for sure with dangerous curves to navigate.
An endless pit for Pakistan is our reliance on imports. We as a nation are hooked on using imported products and consider their usage as an element of pride. Multiple drives of "Be Pakistani Buy Pakistani' have only resulted in our retail shelves housing more and more imported products.
Being myopic, the current state of affairs shows substantial pent-up demand exists for raw materials. As an estimate, there would be USD 2+ billion worth of material at the ports awaiting clearance and payment. Similarly, another USD 3+ billion worth of expenses are overdue or will fall due in the next few weeks arising from imports done over the last 6 months.
Using a conservative estimate over USD 5+ billion of payments are ready to pay; some for goods imports under LC and DA, some for services imports utilized in the country, and others for dividends repatriation. In total over USD 10+ billion in payments are ready to flow out as the pipeline for payments opens up.
On the flip side, the inflows situation paints a bleaker picture. Due to the global recessionary impact, exports have been under pressure, and store sales have reduced. It is estimated that local textile goods production units are operating between 50% to 70% resulting in a BoP impact of USD 8-10 billion.
Due to the multi-tier exchange rate within the country, remittances have trickled away from the official channel. This shrinkage in remittances is expected to cost the economy around USD 2+ billion in exchange flows. Overall the results in a USD 12+ billion dent on the inflow side, most of which has started to materialize and is now visible in the numbers.
FDIs have undertaken a vanishing act both in the area of portfolio investments and in the area of long-term investments. Be it bonds, equities, business investments, plant expansion, or fresh investments all have nearly dried up.
Global risk parameters for Pakistan have shot up and these are reflected in the CDS trading at near highs. These levels seem illogical and would normalize sooner rather than later but these show the uneasiness within the global investor base on Pakistan.
Basing the conclusion on two pillars; (One) the key element of the IMF agreement is a 'market-based exchange rate' and (second) the economy and local supply system is dry and has a pent-up demand for industries to meet as economic activity starts to pick up.
While as a nation our blood group is 'Positive' the situation on the ground looks substantially bleak. The scales seem titled towards PKR being under pressure over the next few months as economic activity tends to grind towards normalcy.
A slow and steady grind toward 300 and then 320 looks like a chartered path for the first half of the fiscal year with the change starting as the baton gets handed over to a caretaker government.
Copyright Mettis Link News
Posted on: 2023-07-19T15:09:16+05:00
