For incoming government, winning should be the least of worries

As the economy teeters on the brink of collapse, those who win the elections will face unprecedented challenges.

KARACHI:

With widespread consensus that Pakistan will enter into another International Monetary Fund (IMF) programme, the timing for the upcoming elections could not have been worse. As the incumbent government is expected to be replaced by a caretaker setup by March, the period up to that point will likely be marked by suspended policies and reforms.

Based on a survey conducted by AKD Securities and data analysed by The Express Tribune, both macro- and microeconomic indicators for the country remain bleak. The incoming government will definitely have a lot on its plate.

Balance of Payments position

Foreign exchange reserves, according to the latest data available from the State Bank of Pakistan (SBP), currently stand at $13.4 billion, of which the SBP holds only $8.458 billion. This amount is sufficient for only approximately four months worth of imports. The AKD survey suggests that the import cover is destined to fall below three months’ worth by April this year.

Considering the obligatory IMF stand-by arrangement repayments, the external position still poses risks, even as the current account is $62 million in surplus (in the July-January period of fiscal 2013). Meanwhile, inflation figures appear not to be moving. Keeping in view this situation, there appears to be little doubt that Pakistan will be forced to retire its previous IMF loan with another one.

It seems as if that is only a matter of time. According to most fund managers, waiting until after the elections will be too late, resulting in a Balance of Payments (BOP) crisis if inflows, remittances and the Coalition Support Fund (CSF) do not materialise. Remittances have so far totalled $8.21 billion in the ongoing fiscal year, while Pakistan received $1.81 billion in CSF payments in the first seven months of the fiscal year.

Rupee depreciation

After Pakistan paid $145 million back to the IMF on February 11, the rupee touched Rs100 against the greenback. That bad news will come back to haunt the rupee, as its parity with the dollar is expected to further deteriorate to 103 by June, and to 105 by the end of this year – for a full-year depreciation of 8.1% – according to AKD Securities. The next IMF repayment of $398 million is due later this month on February 26.

Reviewing the data regarding the import cover back to the 1990s, the rupee on average depreciates 11% against the dollar every time the import cover falls below three months.

So far, the rupee has held up due to CSF inflows: but they are not expected to arrive for the rest of the year. Thus, any inadvertent delay in securing the IMF arrangement may cause Pakistan to scramble to secure finances – meaning an above-average fall in the rupee’s value against the dollar.



Monetary policy

Average inflation clocked in at 8.29% for the first seven months of fiscal 2012-13, and the central bank’s governor, during the latest monetary policy announcement, has said that the full-year consumer price index – the primary measure of inflation used in Pakistan – will range between 8-9%. However, the number to watch is core inflation – the non-food and non-energy measure – which hit 9.9% in January, with the seven-month average also at 9.9%.

That means an end to the monetary easing regime, with monetary tightening taking precedent in the SBP’s strategy framework. Brokerage firms predict that interest rates will sustain at current levels in the first half of 2013, then inch back to the double digits in the latter half.

On the macroeconomic front, the economy will stay entrenched in below-par (less than 5%) GDP growth. Pakistan’s GDP grew only 3.7% in fiscal 2012, which will keep the SBP in a catch-22 situation where, despite sluggish growth, it will opt to keep interest rates level. In view of fiscal extravagance and a weak external position, medium-term macroeconomic discipline is likely to arise only under the IMF’s ambit.

Karachi Stock Exchange

As the election process is expected to run its course more or less smoothly, Pakistan’s largest bourse – the Karachi Stock Exchange (KSE) – will remain flattish until June, say money managers.

After a steep fall on January 15 on some political drama, the market has rebounded strongly as its fundamentals are still strong. It has closed positive on 20 out of the 23 sessions since the selling frenzy.  Analysts expect the market to hover around the 17,500-level till June, before embarking on another bull run to touch 18,500 by the end of 2013, implying a full-year return of 9%. The KSE posted a 49% gain in 2012 – the best return any market offered that year.

AKD Securities believes that the benchmark KSE-100 index has enough support from corporate earnings and undemanding valuations to reach 18,500 points over the next few months.

Moreover, continuing unconventional monetary policy response by balance sheet expansion from the US to Japan should see unrestricted funds flow into emerging and frontier market assets through most of 2013. In this regard, Pakistan has received positive highlights with its recent market performance, where a recent Reuters article covering Lipper of the World’s Equity Funds showed 14 funds from Pakistan ranked within 100 of the best in the worlds.

Published in The Express Tribune, February 18^th, 2013.

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