January 10, 2022 (MLN): The year 2021 observed major ups and downs owing to the growth accelerating policies in early days which drived the economy into the overheated zone. later, economic managers had to change the gears to make a fresh start and the impact will be visible in 2022.
Going by the discussions and talks across all the media channels and research houses, it seems IMF is a survival tab for Pakistan. The performance of every economic indicator is intentionally or unintentionally associated with the delay in the IMF program. Resultantly, the hype and uncertainty have become the market drivers in 2021.
Since the expectations are very high pertaining to the receipt of the tranche by IMF in the first months of CY22, things are being planned accordingly in order to be prepared for the upcoming 6th review of the IMF Executive Board meeting which will be scheduled in the last week of January 2022. In this regard, the mini-budget and SBP’s Amendment bill was tabled before Senate on December 30 and later was introduced to National Assembly.
Not to forget, the restoration of economic activities after lockdown amid the Covid-19 pandemic has created aggressive demand and distorted the supply chain across the globe. Resultantly, the commodity prices saw an aggressive spike in the outgoing year and badly erode the import bill of Pakistan to touch touched a record high of $7.847bn in November’21.
This rising import bill posed a serious threat on the external side while putting pressure on the home currency. The external pressure had made its way to the domestic consumers lately as it pushed Consumer Price Index (CPI) to touch a 22-month high of 12.3% YoY.
However, during the past months, it has been observed that the increasing trend of commodity prices has started cooling off and the external sector will likely witness some ease.
At the same time, in order to manage the inflationary pressure, the SBP had made an aggressive move by raising the interest rate by 275 bps during the last months in CY21.
To recall, the tightening started with the revised prudential regulations for consumer financing to moderate import and demand growth.
Right after another attempt, SBP slashed the lending capacity of the banks and contain aggregate money supply growth as SBP raises the statutory Cash Reserve Ratio (CRR) by 100bps to 6%. While the daily minimum CRR has also been increased to 4% from 3%.
Though SBP communicated that it would likely keep the policy rate “broadly unchanged in the near term”, believing the recent monetary policy actions are sufficient to moderate demand pressures in the coming months and meet mildly positive real interest rates in the medium term, the analysts expect that 2022 will see a hike of 100-125bps in policy rate which will take real interest rates into a slight positive zone.
“Being back in the IMF fold in reality is a welcome sign as it provides oversight on fiscal spending with slippages likely to be corrected, particularly paramount as Pakistan heads into an election year. At the same time, most of IMF's prior actions appear to have already been met with aggressive part of interest rate hikes already done and tempered hikes in the year ahead,” Shahrukh Saleem Senior Analyst at AKD Securities said.
Furthermore, the bulk of electricity tariff adjustments has already been done with another 75-95 paisa hike in base tariff expected by Feb’22. That said, gas tariff hike adjustments need clarity, where LNG price pass-through is likely to form an important discussion point.
The upcoming election in 2023 would also be the major factor behind the expected moderate growth and stabilization in 2022. Historically, in the one year leading to elections, the KSE-100 has posted positive returns in 3 of the previous 4 times, with the outlier being the last elections which returned –ve8.3% owing to weakening economic indicators particularly on the balance of payment side.
With pro-people, pro businesses policies likely to be part of all parties’ election manifestos, we expect market performance to remain strong in the latter half, a report by AKD Securities noted.
Overall, the outlook for CY22 will remain strong since the economy has somehow come out from the weird combination of imported inflation and growth-oriented policies, introduced in budget FY22. The managed interest rates along with SBP’s timely policies to look after the USD/PKR parity in order to improve the transparency in the foreign exchange market would keep the money market and inflation in check.
Speaking to Mettis Global, Zafar Paracha said, “PKR will hover around 175-176 in the short term. However, it is clear that PKR is undervalued, and going forward in the long-term PKR will gain more ground if the macroeconomic stability remains intact.”
Given the expectation that commodity prices would further decline which will obviously ease off the pressure on PKR, he added.
“It seems that rising cases of Covid-19 across the world will soon compel governments to impose lockdown restriction which will give more room to Pakistan to increase its exports and the balance of trade would improve” he noted.
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