The Elusive IMF Tranche and Political Dynamics
Despite Pakistan fulfilling many of the preconditions, the release of the IMF tranche remains elusive. Until greater visibility returns on politics and the economy, it is difficult to build conviction around Pakistan’s investment case.
February CPI was reported above 30%, a 50-year high, while the SPI suggests even faster inflation, north of 45%. Analysts expect CPI prints to peak in the 35-40% range in the next few months, and for the SBP to further increase the Policy Rate by 200bps on April 04 meeting.
On a more positive note, the current account deficit has slowed to a trickle, US$74 million in February and the foreign exchange reserves held by the State Bank of Pakistan rising above US$4 billion on receipt of fresh inflows from Chinese banks.
However, the real economy is under significant stress, especially going by the sporadic plant shutdowns across sectors such as autos and chemicals.
Early on in March, Pakistan introduced a PKR3.8/unit surcharge on electricity tariffs and reduced energy subsidies for zero-rated sectors. This seemed to move Pakistan closer to resuming the IMF program, but fresh bilateral flows have yet to materialize, especially from GCC countries, and the resultant funding gap is preventing the successful completion of the IMF’s 9th review.
It is increasingly unclear whether the program will be able to resume at all, with Pakistan beginning to look in desperation toward US intervention and the earlier flood-related pledges in Geneva.
Although assistance from China has materialized via fresh disbursements from ICBC, and the rollover of US$2 billion in SAFE deposits with the SBP appears likely, Pakistan has to wait for funds from GCC countries.
This could be reflective of a combination of changing geopolitical priorities and greater alignment with multi-laterals such as the IMF to push for economic discipline and reform.
Donor fatigue is not necessarily bad over the longer term, as it may finally force Pakistan to introspect and get its house in order. That said, even if this comes to pass, the initial teething issues will likely be painful.
The Election Commission has postponed the Punjab and Khyber Pakhtunkhwa provincial elections from April to October, after the finance ministry and army expressed an inability to provide funds and security, respectively. This led the Supreme Court to take notice, and in response, the government has moved a bill to curb the Chief Justice’s suo moto powers.
It is becoming increasingly difficult for Imran Khan to return to power, with a postponement in provincial elections to possibly lay grounds for a delay in national elections also. Heightened top-down uncertainty will likely continue to keep investors from focusing on ultra-cheap valuations for now. They would wait for more clarity to build conviction.
Pakistan has taken various prior actions during the last quarter to revive its IMF program. These include but are not limited to an increase in taxes, removal of subsidies, a market-based exchange rate and higher interest rates. Prior actions for the IMF program along with administrative measures have led to a significant decline in Pakistan’s current account deficit which clocked in at a mere US$74 million in February 2023.
SBP reserves stand at a dismal US$4.2 billion but have recovered slightly from a low of US$2.9 billion. The revival of the IMF program now hinges on funding assurance from friendly countries, particularly US$3 billion from Saudi Arabia and UAE.
Pakistan is going through a political crisis along with an economic crisis. Caretaker governments are installed in Punjab and KPK provinces and elections within 90 days of the caretaker government now seem unlikely. The announcement of elections for provinces and the federal government along with some understanding between rival political parties to ease political tensions will be key factors going forward. Any prolonged political deadlock will be detrimental to economic decision-making.
Multiple sectors are facing import restrictions including autos, auto parts, steel and appliance sectors have been majorly impacted in the listed space. Textile companies have faced some issues in getting access to spare parts and chemicals which could affect exports going forward. Numerous companies have informed the stock exchange through notices of plant shutdowns. While some sectors have received some respite during the last month and are now able to open a limited number of L/Cs, the gradual removal of import curbs will be a critical factor to look out for in the next quarter. If prolonged further, the ban on imports will cause permanent damage to balance sheets and could cause defaults on debt.
The Outlook of Pakistan’s economy will also be dependent upon commodity prices going forward. Crude oil prices have fallen from an average of US$83/bbl in 4Q2022 to US$76/bbl in 1Q2023 on fears of a global recession. Lower prices would lead to an improved balance of trade along with lower inflation. The petroleum group makes up a major portion of Pakistan’s imports and was 31% of total imports in February 2023.