Looking up!

The news flow is positive this week. The financial commitments from Saudi Arabia ($2 bn) and UAE ($1 bn) have poured in, and these are followed by the IMF’s board approval of SBA and the $1.2 billion tranche. Out of these inflows, $2 billion from Saudi Arabia is for budgetary support and rest is for balance of payment support.

In the press release issued by the IMF, the inflation is projected at 25.9 percent in FY24 with the end-year number at 16.2 percent. The current account deficit is projected to be at 1.8 percent of GDP and the GDP growth at 2.5 percent. If history is any guide, IMF usually offers conservative estimates/forecasts in its reports, and the actual number arrives a bit differently.

This time is no different.The consensus amongst market players is that inflation will average at around 20 percent in FY24 and the year to end around 13-14 percent. On the current account, the deficit might be slightly less than what IMF is projecting, and the GDP growth might be around 2-3 percent as FY23 final number would be deep in red than the IMF’s estimate of negative 0.5 percent.

The question is about the outlook on currency and the interest rates. If the IMF numbers are of any guide, and seeing the text of the press release, the Fund expects further increase in the policy rate. It would be interesting to see the inflation readings in the coming few months, as if there is going to be any increase, it would be around October, and SBP has yet to release the monetary policy calendar.

The T-Bills Auction earlier this week was interesting as well. The participation was very healthy at Rs1,997 billion against the target of Rs900 billion. Most of the participation (Rs1,500 bn) was in 3-Months while a healthy participation of Rs335 billion was in 12 Month paper.

Neither the market was keen on investing in 6M, nor the government was interested in picking.

The way bids were and how the government responded, it appears that both markets and government are expecting a rate hike in the next 3-6 months, and the market is expecting the rate to come down in 12 months’ time. Well, the chances of increasing in the 1HFY24 are less than the chances of decline in the 2HFY24. If Sri Lanka is of any guide, they have a second rate cut after the getting into the IMF progarmme and its policy rate is now at 12 percent.

In case of Pakistan, sharp cut in rates is expected in the 2HFY24.

However, this is contingent upon how currency behaves. The appreciation yesterday right after the IMF broad’s approval and with $4.2 billion inflows was measured. Some were expecting higher appreciation; but that wasn’t the case. Informal talks with exchange companies suggest that there was no selling pressure in the open market as well as there was no buying pressure.

One of the conditions of the IMF is to lift import restrictions and to have proper forex market functioning.

There are backlogs of payment (dividend, royalties, airline payments etc) which are estimated to be around $2 billion and then the L/C openings must be normalized which were being restricted. Now with these expected outflows, the currency may come under pressure, going forward.

It would be interesting to see how the currency behaves and its impact on inflation. The key is to un-anchor the inflation expectations which were entrenched. The way sentiment is shifting, in the short to medium term, the inflation expectations may subside and that makes the case of stable currency (around current levels) and decline in the interest rates in the second half more plausible.