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SBP has increased the policy rate by 150 bps to 13.75 percent. The gap between market rates and SBP policy rate is thinned as market rates have come down a bit and the SBP has increased its rate. SBP hasn’t given any forward guidance since it is difficult to predict the situation in such a fluid environment.

The key is the on-going negotiations with the IMF. The Acting Governor of SBP and Finance Minister along with teams are in Doha negotiating with the IMF. The staff level agreement is not only dependent upon the plans on energy subsidies but also on the upcoming budget. The review can only be completed and presented to the board once the budget is presented and passed by the national assembly. Since the talks on budgets are line by line, the review conclusion can perhaps be delayed by a few days (or weeks). However, the authorities (both MoF and SBP) are confident that some comforting statement from the IMF is possible based on the development so far.

Then the rollover from China of $2.3 billion is expected “very soon”. These two factors can calm the sentiments and bring some sanity in the money and exchange rate markets. Already, the exchange rate is kind of stabilizing around the 200-mark against the USD. This can very well appreciate given there are some clarities on the political and economic fronts. On economic front, China’s rollover and IMF’s comforting statements are enough.

The problem is on the political side where PTI is fully charged up and geared towards a march towards Islamabad tomorrow. This has to be defused and that can only happen with an announcement of next election. Best scenario is that PDM presents and approves the budget, does some agreed reforms and leaves the seat for caretakers, going for elections in the fourth quarter.

Coming back to monetary policy, SBP is once again behind the curve. The market participants expect T-Bill rates to remain upward sticky in the coming month or two. SBP can sort this out through higher duration reverse open market operations and the other option is of outright purchase of government securities from the secondary market. However, secondary market purchase is tantamount to quantitative easing which IMF is not a fan of. That is why if the market rates do not comedown before the next T-Bill auction, a higher tenure OMO is very much on the cards.

The million-dollar question is on the outlook of exchange rate. That has been infree fall due to government’s indecision and political uncertainty. “Domestically, an expansionary fiscal stance this year, exacerbated by the recent energy subsidy package, has fueled demand and lingering policy uncertainty has compounded pressures on the exchange rate”, noted the MPS.

Thus, if the subsidies are shaven off gradually and China rollover becomes real, given also that IMF gives a comforting pat and political temperature is tamed by the announcement ofan election date, there is no reason for PKR to not appreciate back to 185-190 levels against the USD.


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