By Muzammil Aslam:
November 22, 2018 (MLN): IMF’s technical team, led by Mr. Harald Finger concluded its discussions on the bailout program, on an unsettled note, on November 20, 2018. Interestingly enough, neither side issued a confrontational or controversial statement, on the matter.
However, there is a certain anticipation about how this news will be received by the markets. I have personally delayed my feedback on this news and have been reading different reviews.
Encouragingly, nothing negative has surfaced so far, especially amongst media, opposition, experts and businessmen, who all seem very calm. Keeping a more hypothetical and neutral outlook on the situation, my takeaway from the whole episode is as follows;
1- Assuming, everything had been decided between the staff team and Government authorities, even then the program could not have started before IMF’s board meeting due on January 15th 2019. So our Finance team could be buying time to deliberate on conditionality’s demanded by the Fund.
2- Finance Ministry’s composed attitude reflects their confidence on the financial commitments they have received from Saudi, China, UAE and others sources.
3- If the above said is true, then the Government must be planning to decide at the last minute, whether or not to indulge in a fresh IMF program. I believe this is a smart move.
4- The press release from IMF’s end has not mentioned any deadlock as they declared all the discussions so far as productive.
The concluding remarks from the IMF on this visit were;
“The IMF delegation has been engaged in productive discussions with the Pakistani authorities on economic policies and reforms that could be supported by a financial arrangement with the IMF. In this context, there has been a broad agreement on the need for a comprehensive agenda of reforms and policy actions aimed at reducing the fiscal and current account deficits, bolstering international reserves, strengthening social protection, enhancing governance and transparency, and laying the foundations for a sustainable job-creating growth path. Our dialogue with the Pakistani authorities will continue over the coming weeks”
On the other hand, the statement issued by the Ministry of Finance’s spokesperson is as follows; “There are ‘Outstanding issues' with IMF, bailout talks extended until January 2019.”
The question remains, how will the market walk through this news?
Exchange rate: Within the currency market, speculations regarding further devaluation demanded by IMF will reduce the panic for the next two months and we may see a stable Rupee-Dollar parity.
Debt market: Market is already pricing in one hike in policy rate. However, the anticipation of hiking the rates to 12 percent on IMF demand may not sustain now. Given the rapid decline in oil prices during last month, the inflationary expectations will also come down. So a maximum of 100bps hike in rates is expected in the upcoming policy review.
Capital markets: Stock market hates uncertainty and may not like the fact of further delay in IMF program. But stability in exchange rate and lower than expected hike in policy rates may boost sentiments. Moreover, the investors’ confidence is also likely to boost, as their belief on materialization of financial commitments by friendly countries may further strengthen on the back of IMF & Finance Ministry statements.
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