Clarity still missing regarding IMF, despite positive vibes

By Syed Faran Rizvi

On the sidelines of the 7th World Government Summit (WGS) held in Dubai on February 10th, the Prime Minister Imran Khan held meetings with top officials from the UAE government as well as the Managing Director of the IMF, Christine Lagarde. Although details of any potential upcoming IMF program are yet to meet the public eye, there have been news stories circulating of talks being in penultimate stages of an economic assistance package. A statement on social media from the PM also suggests both the government and IMF being on the same page regarding a need for “deep structural reforms” to take the country into a phase of sustainable development. Regarding the WGS event, in a typically charismatic speech, the PM addressed world leaders and highlighted Pakistan’s potential which was set to be unlocked in coming years. Key points emphasized in the speech by the PM included (1) improvement in governance which would unlock Pakistan‟s true potential, and (2) opportunities in the tourism sector given the country‟s topographical blessings. In a bid to attract investment, the PM also assured of a shift in mindsets to cater to investors and allow them to earn profits from their investments. Finally, it was unequivocally stated that things can only get better from here and now is the best time to invest in Pakistan, given that a turnaround is on the cards.

 Despite being on the cusp of a potential economic revival, Pakistan has recently been downgraded by international credit ratings’ agencies such as Fitch and S&P. In other news, the projected GDP growth for FY18-19has been revised downwards to 5.2% from 5.8%. If fiscal consolidation measures, which were missing in the mini-budget, have to be implemented (with or without IMF), it will inevitably lead to lower economic growth during the ongoing fiscal year. This would not be too surprising, given that it is now a consensus view that the growth rate would be slower during this year. At the same time, we concur with the PM‟s statement where he mentions this is the time to invest in Pakistan. We use the premier’s own cricketing analogy regarding risk-takers being rewarded. These are the moments when investments could yield healthy and long-term returns. From a forward perspective, as far as the external account is concerned, SBP‟s FX reserves (see table) could settle at ~US$10.4bn by the end of FY19. We haveassumed a current account deficit of US$1bn per month for 2HFY19 and deferred oil facility of US$4bn during the same (we have already utilized US$375mn from IDB). As far as the PM‟s talks with the IMF are concerned, we would again flag that despite all the positive vibes, up until now nothing concrete has been revealed regarding the specifics of a new IMF program.


Contrary to the expectations, the State Bank of Pakistan (SBP) raised its benchmark policy rate by another 25bps to10.25%, taking the tally to 450bps since Jan-2018 and at the highest levels in over 6 years. Ideally, the apex bankcould have done without a rate hike at this point, as in their own words, key monthly indicators are showing visible signs of deceleration in domestic demand.  Additionally,  financial inflows  are  expected  from  friendly countries,  which  will  also  help  provide  some relief to the external account. However, from SBP’s perspective, arate hike is also understandable, given that there has been insufficient tightening support from the fiscal side. Forthis very reason, we had initially assumed 100bps increase during CY19, of which 25bps is already realized.Hence, SBP would have no option, other than to continue a monetary tightening stance in the future; unless ofcourse, much needed fiscal measures are undertaken, providing relief on the monetary front.

Key highlights of the SBP’s MPC meeting


The  key  points  highlighted  by  the  central  bank  in  its  latest  Monetary  Policy

Committee (MPC) meeting are presented below:

Although inflation for 1HFY19 is higher than last year, there has been a slight slowdown  in the  last  two months  on  the  back  of  declining  food  prices  and  a downward adjustment of POL prices. Despite this, core inflation has continued to edge upwards. The central bank has maintained its forecasts of FY19 average inflation at 6.5 – 7.5%, where we also believe CPI should fall within this range unless oil prices move sharply. Real GDP growth for FY19 is forecasted at around 4.0% by SBP, well below the initial  target  of  6.2%  and 5.8%  in  FY18.  Incoming  news  are  not  very  positive from either agriculture or large scale manufacturers. Although  private  sector  credit  has  almost  doubled  this  year,  it  is  mostly attributable to higher procurement costs, continued capacity expansion in power and construction-allied industries and ample liquidity with banks. The  government  borrowings  from SBP  are relentlessly pursuing  a  northwards trend, up 4.3x from the same period last year  (1st  July 2018 to 18 Jan 2019). This could have inflationary implications in future periods we reiterate that a lethargic fiscal policy and tightened borrowings by the govt. from the central bank are the reasons that have compelled the SBP to continue a hawkish stance.

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The Islamabad Policy Institute (IPI) is a nonpartisan, independent policy research institute based in Islamabad. Our goal is to undertake in-depth analysis of challenges and choices confronting Pakistan. We aim to help policymakers and public better understand the world, region and Pakistan-specific challenges and opportunities. We make efforts to engage government, civil society, private sector, media, academia in open debates and dialogue on the most significant developments in national and international affairs. We envision contributing to policy-making through periodic policy-papers putting forward policy-recommendations developed in collaboration with experts and stakeholders in each area. IPI takes no institutional position on policy issues.


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