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Pakistan Economy: IMF Program and its Implications

(PDF attached)

(May 8, 2019)

 

• Given the ongoing discussions with the International Monetary Fund (IMF) team and recent changes in key government positions, we are of the view that Pakistan will likely enter IMF program by June.
• We believe that Pakistan's case is not as acute as Egypt as Real Effective Exchange Rate (REER) index is around 100 (Egypt was 130 before program) and there is no subsidy on fuel (in Egypt fuel subsidy still continues).
• Tax Revenue and budget deficit target will likely be the sticking points in the ongoing IMF negotiations as 10-month tax revenues show shortfall of around Rs345bn (0.9% of GDP) while budget deficit is expected to exceed 7% in FY19 after a gap of 5 years.
• Once again IMF will demand Pak Rupee (PKR) to be free-floated and we expect the PKR to settle in the range of Rs160-165 by Dec 2019 given expectations of REER below 100.
• Given increased taxation measures to shore up revenues, reduction in subsidies and devaluation, we expect inflation to average in low double digits in FY20. We expect Central Bank’s policy rates to peak at 12% during 2019.
• The IMF program is expected to include key technical benchmarks including Net Domestic Assets (NDA) and Net International Reserves (NIR) targets, which will serve to reduce borrowing from Central Bank and increase FX reserves respectively.
• The government will have to increase focus towards privatization and restructuring of loss making state owned enterprises. Further, energy sector reform and resolution of outstanding circular debt will also likely be part of the IMF program.
• Pakistan has a long history of signing IMF programs. To note, benchmark KSE-100 index rallied on average by 37% in 12 months post IMF deal based on last 3 IMF programs. We attribute the improvement in market sentiment during IMF program to improved external account situation on receipt of foreign flows and stabilization on macroeconomic front.
• Now based on the assumption that Pakistan will get a new IMF loan soon we are maintaining our index target range of 40,000-45,000, providing total return of 12-26% from here.