May 3, 2019 (MLN): The outgoing month proved to be nothing but gruesome for the economy of Pakistan due to a number of reasons. Topping the chart of disastrous performance were the equity markets, as they witnessed a significant decline of 1,865 points during the month, demonstrating a negative return of 4.8% on a month-on-month basis.
The factors that caused this jeer worthy performance comprised of interest rate hike of 50bps by the State Bank of Pakistan, anticipations of higher inflation, GDP growth forecast cut down by ADB, IMF and World Bank, as well as delay in finalization of the IMF program.
This doesn’t end here. The proposals that were supposedly being introduced to bring the economy back on track were either rescinded or dismissed on technical grounds. The much awaited and talked about ‘Treasure Single Account’ unfortunately did not see light of the day as it was left at the mercy of Commercial Banks. Similarly, the Tax Amnesty Scheme was sidelined as IMF did not foresee any useful outcomes from it.
Consequently, the E&P companies, Cement sector, and Commercial Banks suffered the most as their combined loss amounted to around 887 points. According to a report by Topline Securities, the sentiments of investors in these sectors were dented due to hindrance in the progress of offshore drilling, as well as failure by major players to decide on a uniform pricing, which caused cement prices to drop.
Nevertheless, the current month is likely to make up for the damages that have been inflicted on the economy. As we are well aware, IMF team is in the country with an aim to finalize the three-year Extended Fund Facility programme. As per media reports, the team had their first meeting with Pakistani officials on Wednesday in which all key policy areas were discussed. If successful, the deal will open doors for borrowings from the World Bank, the Asian Development Bank and launch of sovereign bonds.
However, hearsay has it that the two parties are still having difficulties in reaching a consensus. These differences pertain mainly to the monetary policy, as IMF apparently wants the policy rate to be further jacked up. Reduction of electricity subsidies and upfront taxation measures are another key issues that are keeping the government from moving forward.
The hesitation on government’s part is quite understandable as monetary policy has been tightened rather belligerently since 2018, and any further increases in interest rates would run counter to the objectives of fiscal consolidation. If Pakistan successfully wants to reach an agreement as soon as possible, succumbing to the monetary policy demand seems to be the only way.
In addition to this, the FY19-20 budget is on its way and will be presented on May 24, as originally planned. The budget is likely to place greater emphasis on revenue growth. Moreover, there is a possibility of re-introduction of supertax, which will negate the phased reduction in corporate tax, rationalization of tax credits, and even a rise in GST rates, a report by EFG Hermes said.
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