Pakistan Economy: Weak FX Buffer Stands in the Way of Easing
- Pakistan’s national CPI inflation decelerated to 11.04%YoY in Oct’19 vs. 11.38%YoY in Sep’19, reflecting a high base effect. On a monthly basis, national CPI index jumped 1.8% vs. monthly rate of 0.77% in Sep’19, mainly driven by the housing and utility rates adjustment (housing & utility index: +3.65%MoM) and higher perishable food prices (+13.76%MoM).
- After a relatively soft Oct’19 reading, we project the headline national inflation to once again climb to 11.70%YoY in Nov’19 due to momentum effect and partial reversal of high base effect. Over the medium, it will remain elevated till Feb’20 in the range of 11.50-11.80%YoY, aided both by soft base and monthly utility price adjustments.
- From Mar’20 onwards, inflation is expected to taper off, closing FY20 at ~10.08%YoY, aided by favorable base effects and moderation in food prices, as they come off from recent peak.
- Upcoming issuance of Eurobond (expected by Dec’19) and IMF Mission review (currently underway) are two important checkpoints. Although the reported concession on revenue target will provide some breathing space, the full year target still remains tough, given the authorities still need to show a massive 38%YoY growth (vs. 16%YoY recorded in 4MFY20).
- While better than expected improvement in macro-imbalances is encouraging, reserves buffer still remains critically weak (import cover of mere 2.3months) particularly considering new exchange rate regime. The MPC scheduled to meet later this month will continue to adopt a wait and see approach until it gets comfortable with respect to reserve and fiscal position.
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