Pakistan economy and upfront challenges

Severe macro fears; govt. seeks IMF program revival, another policy rate hike on cards
From the Editor’s Desk
Aggravated macro-economic uncertainties continue to haunt new government, pushing Finance ministry to initiate technical discussions with IMF. However, highlights of political and economic uncertainty will continue to affect performance business sentiments in near term coupled with Rupee stability, which now dependents on external financing and SBP’s medium-term inflation outlook.
The Fund has agreed in principle to add USD 2.0Bn to existing EFF program, which initially was USD 6.0Bn while there are also talks of extending program timeline to May 2023 from October 2022. However, outcome may resultantly be hard conditions including improving fiscal discipline and reducing pressure on the external account.
Besides, as govt. believes in raising fuel prices, inflation concerns have led to a sharp rise in market yields as witnessed by the T-bill auction held during the week where yields for 3-6-12 months paper rose by 129-114-96 bps to clock in at 14.8-15.0-14.8 percent, respectively.
Consequently, making a case for another monetary adjustment of 100bp, sentiments of another monetary adjustment of upto 200bp hike have surfaced. More specifically evident from the rise of c.200bp in 6M and 12M yields since the last monetary policy announcement on April 07th.. The Ramadan effect will likely continue to create its impact food inflation during Apr-2022 where there are witness increase in basket items prices fresh fruits, and oil/ghee. Ramadan/Eid-festivity will also create its impact on clothing index
Pakistan’s fiscal balance in the outgoing nine months of fiscal 2022 posted a deficit of Rs.2,566bn, added 55 percent on year on higher than prior year’s deficit. In terms of percentage of GDP, the deficit arrived at 4.0 percent in 9th month of fiscal22 against 1 percent higher from last year’s same period number based on revised(rebased) GDP figure. However, the primary balance turned negative during the 9th month of present fiscal and stood at Rs. 447bn (-0.7% of GDP) compared to a primary surplus of Rs.452bn, witnessed same period last year of 0.8 percent of GDP.
Total expenditures, on the other hand, went up by 27 percent on year on basis to Rs. 8.44trn, 13.2 percent of GDP as against 12 percent of GDP in 9th month of fiasal21. Further breakup revealed that current expenditure underwent an uptick of 21 percent on year on of which defense expenditures jacked up by 12 percent on year on basis.

However, markup expenses evident a meagre uptick of 1 percent yearly to Rs. 2.11trn. Likewise, development expenditure and net lending undertaken by the government increased by 45 percent on year on basis to Rs 1.05trn. whereas, total PSDP expenditure in 9th month of this fiscal reached at Rs 1.03trn that is an addition of 58 percent with provincial expenditure at Rs. 724bn, and addition of 86 percent of outdoing Federal disbursement of Rs. 309bn, 17 percent higher bon yearl basis.
Similarly, 6M KIBOR rose to 14.1 percent, pushing it to highest level of last 13 years. Consequently, another policy rate hike expectation amongst market participants further dampened sentiment on the local bourse. Moreover, rising fiscal deficit of 4percent of GDP already in 9th month of fiscal22 portrayed a bleak economic outlook while CAD for the month of March 22 doubled on month on basis to USD 1.0Bn on account of rising energy and palm oil prices.
Despite Pakistani rupee stayed resilient throughout week and closed at PKR 185.9USD, taking a dip of 0.5 percent on weekly basis on account of fruitful IMF dialogue to date and possibly a resumption of the stalled program.
Major data releases during the week included:

  1. SBP raised PKR 672Bn as T-bill yields soared by 129/114/96 bps for 3/6/12 month paper respectively.
  2. CAD for the month of Mar’22 clocked-in at USD 1.0Bn, and hike of 179 percent of year on, 98 percent on moth on basis, taking 9th month of fiscal22 CAD to USD 13.2Bn,
  3. 6M-KIBOR hit a 13-year high to clock-in at 14.1 percent, and
  4. Fiscal deficit in 9th month of fiscal22 jacks up to PKR 2.6Trn, swelling up to 55 percent on year on basis.

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