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With the political match lingering on by extending the vote of no-confidence to 28th March, the economic decision making will remain sidelined. The government is offering fiscal relief package and monetary policy of wait and see, with an element of surprise move. In this scenario, the only macro adjustment taking place is drip by drip currency depreciation. The PKR/USD value is almost at the psychological level of 180.

The first line of defense is the exchange rate. And it is working to guard against the accommodative monetary policy and expansionary fiscal policy. The IMF is not happy with the way fiscal commitments are being compromised. The movement is currency is some form of consolation.

The good news in such uncertain times is the oil prices. They were hovering around $100 at the time of writing. And if the oil prices come down further and stay below 100 mark, the fiscal relief package is manageable and current monetary policy setting could be appropriate. Nonetheless, the secondary market yields have already incorporated an increase of 50-100 bps in the policy rate.

The question are how will the currency move from here, how long will lower petroleum prices continue, and whether the monetary policy will act prior to the scheduled meeting in the end of April.

Expect status quo on the fiscal and monetary side till the political dust settles i.e., till the vote of no-confidence happens. Once that is done, and if the PTI government continues, then the oil prices at that time would takethe driving seat.

If the oil prices remain under or around 100 dollar per barrel mark, there would be no shortage of diesel next month. There might be downward adjustment in the yield curve. And the currency may stop depreciating. As the fiscal relief package is nothing but a safeguard against growing international prices, as even at reduced petroleum rates, prices are up by 20-30 percent over the last twelve months. The story of electricity is not much different either.

The import bill is slowing down invariably. Sources close to government reveal that run rate of PBS imports is encouraging with a decline from the previous month while the exports performance is continuing. The risks to the import bill and in turn the current account deficit is high oil and other commodity prices.

And seeing the high commodity prices, some product prices are moving up. This is the best time for companies to make a move as government (which otherwise keep on pressurizing for not increasing prices) is busy in quest of the survival. For example, cement prices are up by Rs100-150/bag in the past few weeks seeing the crazy prices of international coal (energy input for many cement manufacturers at home). Although, they haven’t imported any coal at top rates, they pounced upon the opportunity to improve their falling margins.

With increase in cement, steel and other products prices, construction, and other activities will take a hit. Car prices have increased in the past few months, and some may increase in coming weeks or months. That might slowdown automobile demand as well.

If demand continuesto taper, tightening needs to be less. And there could be less pressure on the currency. Right now, it is better for currency to be the first line of defense and slow drip by drip depreciation is the way to go.


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