Markets confident about approval of IMF tranche

Pakistan’s financial markets express unwavering confidence in the forthcoming approval of the second tranche, valued at $700 million, by the International Monetary Fund executive board. The board is scheduled to convene on Thursday (Jan 11).

Post-approval, the subsequently elected government is anticipated to secure a larger and longer-term loan programme from the IMF to stimulate economic growth, liberalise imports, and generate essential job opportunities. This follows the completion of the current nine-month Stand-By Arrangement (SBA) of $3 billion in March 2024.

Speaking to the Express Tribune, CEO of Arif Habib Limited, Shahid Ali Habib stated, “The caretaker government has fulfilled almost all the benchmark commitments under the ongoing IMF loan programme, suggesting the IMF executive board will give its nod for the release of the next tranche.”

He highlighted the domestic capital and financial markets’ confidence in receiving the next tranche and acquiring the subsequent loan programme. The remarkable performance of the market, with the Pakistan Stock Exchange (PSX) emerging as the best-performing market in the second half of 2023, reflects this optimism. The PSX recorded a full-year return of 55%, elevating the benchmark index to over 64,000 points in December, compared to around 40,000 points before the commencement of the current IMF programme in June 2023.

Read PSX makes sharp recovery on IMF loan hopes

Additionally, the Pakistani currency has witnessed a cumulative appreciation of 1.57%, or Rs4.42, in the past six weeks, reaching a 10-week high at Rs281.22/$ on Tuesday.

Pakistan achieved an IMF staff level agreement at the completion of the first review of the domestic economy under the ongoing programme in November 2023. Habib said, “IMF is happy with the performance of the caretaker government in the review.”

Anticipation is high for Pakistan to secure yet another IMF loan programme, potentially valued at $6-8 billion and lasting at least three years. This would enable the liberalisation of imports, boosting productivity, especially in the large-scale manufacturing sector.

The new IMF loan programme is expected to support the economy, allowing a slight widening of the current account deficit to sustainable levels. This, in turn, would foster economic growth, turnaround, sustainability, and the creation of necessary job opportunities over the next three years.

The programme would also unlock additional financing from multilateral and bilateral creditors, including the World Bank, Asian Development Bank, and Asian Infrastructure Investment Bank.

With optimism surrounding the next IMF loan programme, analysts project continued outstanding performance in the capital and financial markets throughout 2024. Habib stated, “The new programme would make the rupee-dollar parity sustainable in the longer run and help PSX rise to over 80,000 points by the end of December 2024.”

The AHL CEO also indicated that the IMF may encourage the next political government to expedite the privatisation of state-owned entities. While the caretaker government is currently working on privatisation, time constraints may impede completing the tasks.

The IMF is expected to emphasise the continuation of energy reforms, resolution of financial slippages, and structural reforms to enhance tax collection, advocating for an improved tax-to-GDP ratio by taxing wholesale, retail, agriculture, and real estate sectors. Currently, a significant portion of taxes is collected from salaried individuals and imports.

Following the completion of the first economic review in mid-November, the IMF stated that the staff-level agreement supports the authorities’ commitment to advance fiscal consolidation, accelerate cost-reducing reforms in the energy sector, return to a market-determined exchange rate, and pursue state-owned enterprise and governance reforms to attract investment and support job creation, while strengthening social assistance.

Published in The Express Tribune, January 10^th, 2024.

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