July 05, 2022 (MLN): Swelling tides of daunting challenges throughout the fiscal year 2022 have continuously been hinting that economic fundamentals are off the charts, obstructing a way to experience any sigh of relief in FY23.

Economic woes have made Pakistan more vulnerable as it will have to depend on IMF tranche and inflows from other countries to carry out its day-to-day business, i.e., debt payments, and financing import bills.

The combustible mix of unfunded subsidies along with commodity headwinds, soaring import bill worth $80.5 billion in FY22, drying foreign exchange reserves with an import cover of only 1.49 months, and free-fall of rupee as it plummeted by Rs47.30 or 23.09% against the USD in FY22, have chocked the economic growth badly and led the country towards recession.

Obviously, the IMF thing has also played its due role to tighten the economic noose in the name of fiscal consolidation as the government has to lend another tranche to run the country. Resultantly, the country is suffering from 13-year high inflation of 21.3% YoY in June 2022 with lesser opportunities to find employment. Even, people are losing their existing jobs as the big companies are making them abundant in the name of laying off. The middle, lower-middle and poor classes are the ones that are feeling this economic heat as the basic necessities are now beyond their reach due to skyrocketing inflation.

In the backdrop of economic mess and political chaos, the analyst fraternity is of the view that the outlook for the fiscal year 2023 does not seem a rosy one.

“As far as the initial impressions are concerned, FY23 will be the most challenging year with historic high inflation, increased burden of taxes, and unreeling energy subsidies. These factors will drop the demand which will turn into decelerated economic growth,” Fahad Ruaf, Head of Ismail Iqbal Securities told Mettis Global.

Regarding local currency, he said that PKR is in temporary respite on $2.3bn received by SBP from China and on a persisting hope that the government will soon be able to unlock the IMF tranche. However, it will remain above the level of PKR 200 per USD in FY23, he added.

In these depressing times where the poor are not able to make the ends meet, the focus of government should be targeted subsidies, he emphasized.

Speaking to Mettis Global, Tahir Abbas Head of Research at Arif Habib Limited said, “On the back of fiscal consolidation with rising inflation rate around 15%-16% in FY23, the country will witness the brunt of economic slowdown.”

On the other hand, owing to the IMF tranche, the local currency will appreciate to PKR 195 per USD in the short term, he noted.

Pakistan is in a tough spot due to the worsening energy crisis as the rising petroleum prices have surpassed common citizens’ purchasing power and if the matters remain the same, the country’s law and orders would deteriorate, Wajid Rizvi, Research Head at Intermarket Securities said.

An increase in revenue, a drop in expenses with the IMF tranche, and funds from friendly countries will help CAD to cool down for a while. However, commodity super cycle and internal economic issues such as the closure of big industrial units if not being able to bear the burden of energy prices and super tax, are hinting towards the most depressing fiscal year ahead, he added.

Saad Hashmi, Research Head at BMA Capital, on the other hand, is quite optimistic about FY23, “The fiscal year 2022-23 will be better than FY22 as the government has almost fulfilled all the conditionalities of IMF to unlock the tranche.”

He was of the view that inflation might decline if commodity prices in the international market cool down. Meanwhile, on the back of the IMF factor, the economy will see stability once again and PKR would keep appreciating.

On the Financial Action Task Force (FATF) front, he said, Pakistan will be out of the grey list after FATF team’s onsite visit which will attract foreign direct investment in Pakistan.  

To recall, the global financial watchdog, FATF on June 17, 2022, announced an onsite visit to Pakistan to check the real implementation of laws/procedures before announcing its decision on whether Pakistan will be removed from the list.

It is pertinent to mention that 13-year high inflation is making a strong case for another rate hike in the upcoming monetary policy. Analysts are of the view that MPC will increase the interest rate by 50-100 basis points in order to arrest the inflationary pressure.

This would result in less participation in stock trading and the local bourse would become least attractive for the next six to eight months as no bullish rally is expected ahead.

However, business-friendly policies, the decline in commodity prices, and FATF’s positive announcement after the onsite visit will bring back investors’ confidence in the last months of FY23.

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