KARACHI: From an uncertain political climate, Pakistan has transitioned to what can be called a relatively stable environment. However, this 180-degree shift has come at a hefty cost as the country and its stock market have suffered heavily.
The real economy has taken a massive hit from the political developments. Resultantly, the International Monetary Fund (IMF) has anticipated that Pakistan’s economic growth will be below 3% in the current fiscal year 2018-19 compared to a 13-year high growth of 5.8% in fiscal year 2017-18.
The Pakistan Stock Exchange (PSX), a barometer to gauge the country’s economic performance, has continued to reflect sad stories of economic stress since the political drama took centre stage, beginning with the Panama Papers leaks.
The bourse has suffered a massive reduction of $41 billion in market capitalisation to $58 billion on Friday (October 12, 2018) compared to $99 billion on May 24, 2017 when the benchmark KSE-100 index hit an all-time high at 52,876 points.
The historic level was achieved on expectation of Pakistan’s reclassification into the MSCI Emerging Markets index from the Frontier Markets index.
“Panama leaks-led political instability, which later on converted into economic instability…and rupee depreciation, has caused a wipe-off (of $41 billion) in market capitalisation,” Topline Securities Chief Executive Officer Muhammad Sohail told The Express Tribune.
In rupee terms, the market capitalisation dropped 26% to Rs7,705 billion by Friday compared to Rs10,446 billion on the day the PSX hit the historic high. The PSX benchmark KSE-100 index has suffered a loss of 29% to 37,515.93 points on Friday compared to the historic high of 52,876.46 points in May last year.
The health of the economy continued to deteriorate as then premiers Nawaz Sharif and Shahid Khaqan Abbasi and several ministers including finance and commerce ministers failed to find time to look into the matter because they faced graft cases.
The political instability gave birth to tough economic challenges. Exports fell while imports surged. At the same time, oil prices recovered in world markets and put more burden on Pakistan’s economy, which relies heavily on imported oil.
Lack of focus on economic developments led to rapid depletion of the country’s foreign currency reserves, widening of current account and fiscal deficits, mounting foreign debt to historic high and balance of payments crisis.
The current government has formally approached the IMF to acquire a bailout programme to deal with economic challenges as foreign currency reserves have dropped to less than one and a half month of import cover at $8.3 billion.
To deal with these issues, the State Bank of Pakistan (SBP) has let the currency depreciate by a massive 25% to Rs131.93 against the US dollar since December 2017 and revised up the benchmark interest rate by 275 basis points to a 44-month high of 8.5% since January 2018. The IMF has suggested further depreciation and rate hike.
“Going forward, the PSX would perform in line with cues that will come out of Pakistan-IMF talks for a new bailout…as to how stringent the terms and conditions for the bailout would be. Moreover, the duration of the downward spell in global stock markets would also indicate the direction of the local bourse,” Sohail said.
Arif Habib Limited Head of Research Samiullah Tariq appeared quite optimistic and anticipated that “the PSX benchmark KSE-100 index will rebound to 42,000 points in six to eight months.”
He said the current government had identified root causes of the prevailing economic problems and was expected to take corrective measures soon.
“Prevailing oil prices at world markets and downturn at global stock markets may also cue PSX in short to medium run,” he added.
Published in The Express Tribune, October 14th, 2018.