Rs500 note now selling for Rs25 instead of Rs50

May 13, 2022: On April 7, the incumbent finance minister Miftah Ismail speaking to a talk show host advised viewers on national television to invest in the stock market claiming that the current stock prices were once in a lifetime opportunity. In the same breath, he promised a major economic turnaround once Prime Minister Shahbaz Sharif takes over the charge of the government.

He said that the Rs500 note was priced at Rs50, hinting at a dirt-cheap valuation of stocks.

On the next day, April 8, the benchmark KSE-100 index responded with a 700-point gain, pinning its hopes on the new government to take the necessary measures to resolve issues facing the economy.

Then on April 11, the KSE-100 rose another 1,700 points. The government’s allies including the former president Asif Ali Zardari said the market’s rise was a testament to the public’s confidence in the new government. 

Other political leaders also shared their two cents on how the stock market’s performance was a reflection of better things to come.

However, as the weeks passed, the statements turned out to be hollow.

PM Sharif and FM Ismail backtracked on their commitments to withdraw subsidies on the fuel and power prices fearing political rebuke. With subsidies in place, the government found itself on the back foot while negotiating a resumption of the International Monetary Fund (IMF) programme. Meanwhile, other bilateral lenders including China and Saudi Arabia also backed out of lending additional funds citing external woes.

With these news reports, bears tightened their grip on the market, reserves fell quickly, and the rupee shed its value against the dollar with the four-month high imports for April, and the outlook for the current account deteriorated.

The market waited with bated breath for the withdrawal of subsidies and an announcement from either the IMF or the bilateral lenders for funds to finance the current account deficit. It’s been more than a month now and none of these have happened.

Instead, the market is now fearing the worst. Miftah’s failed talks with the IMF and PM Sharif’s failure to garner Saudi support have wreaked havoc on the market. So far, the market has closed 11 out of the last 13 sessions in red.

Another impact of the delayed response to the fuel price cap withdrawal can be seen in the higher fuel sales during the month of April. The 11%MoM increase in sales of MS and HSD shows how the middleman is beginning to store fuel in anticipation of a hike in fuel prices. Meanwhile, this would offset the country’s fuel supply chain putting additional pressure on the government to import costlier petroleum products and crude oil.

The current government seems to be too worried about the political fallout from withdrawing subsidies. Meanwhile, the shadow government in London (Nawaz Sharif and Ishaq Dar) has further added to the confusion on who’s calling the shots in the government.

With that said, it’s still not too late. After keeping in the prices intact during the last two announcements in April, the government can begin to unroll the subsidies gradually through piecemeal increase in fuel prices starting with the fortnightly announcement due on May 15. It can start with undoing the subsidies on the electricity tariffs for consumers with higher unit consumption and shield the lower strata of consumers until the fuel prices begin to fall.

This would not only reduce the fiscal pressures but also bring the IMF back to the negotiation table (talks with IMF are set to begin on May 18 in Qatar as per the latest reports). An agreement with IMF would also unlock the funds from other bilateral and multilateral creditors such as the World Bank, Asian Development Bank, China, and Saudi Arabia.

If the government doesn’t announce these measures, then going by FM Ismail’s own analogy, the same Rs500 note would be selling for Rs25 and nobody would be willing to buy it.

Copyright Mettis Link News

Posted on: 2022-05-13T10:17:22+05:00