EUR 12.81 For Business Accounts Only

Pakistan Economy: IMF Statement Analysis

• The International Monetary Fund (IMF) and Pakistan government finally reached staff level agreement recently and issued statement highlighting key contours of the discussions and program. Following are our key points and our view:
• The upcoming budget will be aiming for a primary deficit of 0.6 percent of GDP: This provides some indication as to how much of fiscal deficit the government will be aiming for next year and will likely be key prior action of the IMF program. Assuming debt repayments of around Rs2tn, the government will likely target a fiscal deficit of around 5% for FY20 (we assume 5.7%) compared to around 7.3% expected this year.  Containing of fiscal deficit will result in lower increase in public debt, which is also an objective of IMF.
• The above fiscal deficit target for FY20 would imply that the government will be aiming for tax revenues to increase by Rs600-800bn next year, which is around 2% of GDP. This will be a tall order given dismal GDP growth expectations of 3.5-4% for FY20.
• The PKR will have “market-determined exchange rate” rate as per IMF: This has been doing the rounds for some time and was highly expected as part of the upcoming IMF program and is likely the second key prior action. To note, State Bank of Pakistan (SBP) also states that it has been “following a market determined exchange rate regime (since 1999)”, albeit with significant intervention to control the level of PKR.
• In early market trading today, the PKR was trading at Rs145/146, down 2.5-3.0% from previous close of Rs141. We believe that IMF demands less intervention this time around, as the rate had been aggressively managed during the previous Govt.’s tenure, which made PKR significantly overvalued against Dollar. This was also evident from Real Effective Exchange Rate (REER) index level - measures the PKR fair value against regional currencies – which reached 128 in April 2017.
• The Central Bank will leave the PKR rate to market fluctuations to the extent that it will have limited intervention (due to adherence to quarterly reserve targets by IMF), but may not be completely left to the mercy of the market, we believe. To highlight, REER index level was last reported at 104 (as of March 2019) by the Central Bank and will be around same level now after today’s movement in PKR.
• A Three-Year Extended Fund Facility (EFF) of US$6bn: Even though we were expecting a 3-year EFF, the size of the program of US$6bn came below expectations given the significant size of the external funding gap of the country in the next few years. However, as per Finance Advisor, Mr. Hafiz Shaikh, there is expectation of US$2-3bn funding from World Bank (WB) and Asian Development Bank (ADB). The government will also likely raise bonds at competitive rates in international capital markets while bi-lateral funding from China, Saudi Arabia and United Arab Emirates may also come during the program.
• The Central Bank will be focusing on reduction in inflation: This clearly implies hike in policy rate. We expect that Policy Rate will peak at 12% in 2019 (compared to 10.75% now). There is market expectations and news reports that interest rates may be hiked by 100-200 basis points in next few months.
• IMF Statement pitches blame of economic issues to previous policies: The IMF statement is clear in stating that past legacy and inconsistent policy making (“uneven and procyclical economic policies”) has led to current economic issues. This will help provide some room to the current economic team when it comes to adhering to key economic  benchmarks in upcoming IMF program.
• IMF has stressed on protecting social spending: Income support programs will likely be increased in the upcoming budget and has also been highlighted by the Finance Advisor recently.