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Taming the inflation monster is turning out to be a challenge at a time when many analysts were expecting the inflation to be in control due to the restoration of the IMF (International Monetary Fund) relations, ending of the high base effect and possible softening of the global commodity prices. They are now revising their models on the spreadsheet.

SBP’s (State Bank of Pakistan’s) medium -term inflation target of 5-7 percent is as elusive today as it has been for the past three years. The buzz is that another 2 percent increase in the policy rate is due before the tightening cycle concludes – expect half of it (1 percent increase) today.

The key challenge is restoration of investor confidence. And in its absence, the dollarization continues. This along with a surge in the global commodity prices (such as oil and grains) due to better than expected global (mainly the US) economic recovery is keeping the inflation challenge very much alive.

Then the IMF was very much critical of the SBP for not being proactive in managing inflation through timely tightening and resulting in even higher inflation.

The question is how to revive the investor confidence. The IMF has given a lifeline to the ailing economy. There are no tough conditions attached to the current SBA (Stand-By Arrangement). Still confidence is at a low ebb.

The stability of the system is missing. Private investors and the business community are not entirely convinced of the soundness of state’s plan for billions of dollars of investment and selling of assets to GCC state-owned companies. The involvement of the private sector is missing.

The underlying competitive environment keeps eroding. And that cannot be improved without carrying out meaningful economic reforms. Unfortunately, however, nothing is happening on that front – neither by the state nor by the IMF.

The IMF’s report is tough, and the underlying tone is negative which is suggestive of similar sentiments of the IMF staff. The frustration of the writers is very much visible from the language. However, the absence of loaded conditions and benchmarks depicts the soft stance at the board level.

All what the IMF is asking for is a market-based exchange rate with clear continuous benchmark of not allowing the open market rate deviating from the interbank rate. Then the condition of keeping the energy circular debt growth in check by power tariff revision is another important inherent benchmark.

And the positive trigger could have been that the IMF has categorically said the government’s debt is sustainable on the baseline case (though the baseline is quite optimistic). This implies that in the absence of any fiscal misadventure, the debt is sustainable, as per the IMF.

The stock market boom is reflective of these assumptions. Commercial bank stocks rallied as the near future chances of domestic debt restructuring faded. Then the strictness on the circular debt growth check has boded well for the energy sector. Having said that, the skewed taxation on the already taxed sectors and passing on of all the energy sector inefficiencies on the consumers is eroding the industrial competitiveness.

The business community does not agree to the IMF recipe of solving the energy circular debt and management of supply side inflation solely through increasing interest rates. The real game changer could be coming up with tax reforms in the real sense and curbing the energy circular debt by dealing with transmission and distribution inefficiencies and growth in energy consumption.

However, what is happening is the exact opposite. Power consumption is falling, which is pushing the capacity charge higher as the production capacity is enhancing.

Having said that, the situation is certainly better than before. The key is to capitalize the lifeline by carrying out reforms. However, it is not easy – especially when those in control do not have mass public support. That is making the task of instilling reforms even more challenging. The investors desire stability and a clear roadmap ahead. That is simply missing.

Then the kind of roller coaster ride the economy had in the last year or so has its bearing. The massive currency depreciation and wealth erosion have a lasting impact on the investors and business community. There is no crazy buying of foreign currency now; but those who are married to dollars are not looking to convert to PKR. Most are following the wait-and-see policy.

If there is going to be stability in the next few months, the situation can improve. Otherwise, it’s a matter of time before the authorities deviate from optimistic baseline debt sustainability scenario.

Copyright Business Recorder, 2023

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Ali Khizar

Ali Khizar is the Director of Research at Business Recorder. His Twitter handle is @AliKhizar

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zaya zaya Jul 31, 2023 09:47am
Thanks for providing a Reality Check to the Rulers or would be Rulers, who have no idea so far what to do or how to restructure the Economy, without which there is no chance of FDI. The emphasis on Exports Diversity to enhance overall exports; this can only come from death of some declining export industries and widening the product range for exports, new products must be generated. IT sector can be a big winner as we know the talent is there and it was starting to takeoff in 2021/22 Plus one of the IMF loan SBA condition was that elections are held in 9 months by end march 2024, so that loan instalment 2 is given to caretaker and 3 is given to the new elected govt. Anything either side of it will not be accepted by IMF and Pakistan economy will be in chaos and will faulter.
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Sainjee Jul 31, 2023 10:36am
The economy is doomed when army becomes a commercial entity and acquires agricultural lands, who will defend the country the generals are busy making money>
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KU Jul 31, 2023 12:07pm
The building blocks of our industry and agriculture do not exist to attract any kind of investment. Also included in the fact is the menace of bureaucratic gratifications and corrupt practices that discourage any form of investment in any sector of the country. These are dangerous times for Pakistan, while the monarchs assume that much of the same habits and lies will save their dynasty. The current desperation of the young generation and people are a clear indication of bad times ahead.
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Sainjee Jul 31, 2023 01:00pm
@KU, Thanks to vision and leadership of Indian leaders their youth are ruling the global intellectual domain, in contrast due to myopic , egoistic and corrupt leadership Pakistan's youth have no job opportunities at home they are escaping and ending up drowning in high seas.
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KU Jul 31, 2023 01:15pm
@Sainjee, No, you are mistaken. This is not about who has smart answers or comments on the topic but it is much to worry about. Don’t read the headlines only, read about the youths in your country who are left behind. Also, worry about the 1.4 billion population load, even India cannot feed them in case of drought or any other calamity.
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Fazeel Siddiqui (Overseas Pakistani) Jul 31, 2023 03:01pm
75 years invisible rulers had no confidence, on their footsteps resident Pakistanis lost confidence on state of Pakistan 20 years back and finally now Overseas Pakistanis has lost hope in Pakistan. Only way forward is securing more loans, sell assets of Pakistan more importantly sell your militancy power in war conflicts on rent.
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Awami Jul 31, 2023 07:54pm
@zaya zaya, You comment, IT sector can be winner. It is one of most competitive sector and neighbor wages are low and high productivity. If you look at domestic business we have more Profits in not in hightech or Lowtech but in NOTech. So there many no tech involved business making good money. Need to also look at low tech which make money , need to think at ground level at this time.
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Basharat Din Aug 01, 2023 12:29pm
Agreed.
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Adnan Aziz Aug 02, 2023 07:55am
When irrelevant people enter into territories not meant for them (agriculture, investments, economy, foreign affairs etc.), consider themselves 'aql-e-qul' and express themselves on every topic in their official capacity, no investor would like to come to Pakistan. The interesting aspect is that this so-called the intelligent and the bravest nation on this planet gets fooled every day and there is no protest. The only protests staged here from time to time are...........
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Alex Aug 05, 2023 10:07am
@Sainjee, paindoo and rogue generals do not want youth to get educated so that they can be easily controlled.
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Alex Aug 05, 2023 10:24am
@KU, Not true...US companies have outsourced thousands of IT jobs to India...Indian youth and professionals are getting those jobs earning dollars...in contrast to Pakistan.. higher education is dead...there are no jobs for youth...in south India a large number of mega IT campuses employing thousands of youth. Indian leaders have outsmarted Pakistani leaders in terms of creating opportunities for their youth. Look at Indians coming to USA /Canada...150,000+ Indians are granted US student visas per year.. 80,000 Indian students have come to Canada...in contrast for past 30 years every year around 5-7k Pakistani students are grated student visas...Pakistani corrupt leaders have failed to create opportunities for Pakistani youth at home and abroad...and as a result...youth..legally and illegally leave country seeking better opportunities...and end up dying at high seas...in jungles of central America...at borders of EU countries...corrupt ruling elite has doomed the dream of Pakistan!
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