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After Elections Pakistan Will Be Seeking IMF Help

July 31, 2017

@asadcmka
Asad Rizvi

It is a daunting task to assess the economic impact after ousting of Nawaz Sharif by the Supreme Court of Pakistan, as the stakes are higher and options are limited. Leave aside CPEC, as I believe that it has nothing to do with ongoing politics. In such a situation the country cannot afford filtering out of more bad economic news.

Though at Fiscal Year end (June 2017) the size of economy grew to USD 302 Billion and attained 5. 3pct growth, but some of the closing economic data that were released indicates that in number terms the economy got mildly exposed due to adjustments, as the country is still committed to meet certain target levels set by IMF under EFF 2013-16 supported programs.

If we take a look at the overall pattern of 15-years old trend of Mounting Debt and Deficit Financing, it reveals that Liquidity Management (Domestic & External) is the mother of all problems faced by the economy due to lack of growth initiative in industrial and manufacturing sector.

More recently another “Opportunity Cost” of nearly USD 20-22 Billion of oil savings was spilled over after late 3rd QTR 2014 oil collapse, but our economy was unable to economize resources that was spent mindlessly and is wasted.

This may be debatable, but as the country is approaching national elections, I strongly believe that Ishaq Dar is the key man for the ruling party to handle all matters pertaining to our troubled economy. His absence can make huge impact, as he is the master of making amends.

Minus Pakistan’s Total Trade, if we take a look at Management of Circular Debt, FX Reserves Management, Currency Stability, Domestic/External Debt, Size of Government Securities, and Debt Servicing that almost covers the overall economy. His absence will increase the volatility risk, which is bound to cause economic turbulence.

Policy Rate/Exchange is another key economic factor that will play major role in determining the fate of future economic trend. Unlike our Hawkish Policy Stance, which has a pro-inflation tilt, BOJ, FED, ECB and BOE are no goofs that they are holding rates well below 2 pct since over a decade. It is because they are well aware of the consequences of high funding cost.

Despite stubbornly below-target inflation rate our economy is paying high price due to expensive Domestic Borrowings caused by High Policy Rate and hence, is selling expensive Government Bonds. It is mind-boggling that why our economic managers instead of curtailing borrowing cost is paying such a high price, which is caused by Revenue shortfall (since 3-decades).

Similarly, the economy is paying high cost to service its external debt due to falling trend in exports since last 7-years and mild dip in remittances resulting widening of current account deficit

Disputing that depreciation of Rupee will push exports higher and curtail Import is a mere joke. Import of annual oil bill is almost half the size of oil bill that was 3-years ago, which roughly averages around USD 7-8 Billion.

Therefore, unless we stop buying stuff minus CPEC related machinery and energy equipment’s, curtailing of current account Deficit is a wishful thinking.

Election Year Risk & IMF

The writing is on the wall, next government will soon have to approach IMF for help. Politically this could be most hated proposition, but despite last two outings, since 2009 the economy failed to respond to achieve desired result. Hence the economy is unlikely to breath with comfort without foreign funding assistance to fill maturity gaps that also has many strings attached.

The problem with IMF loan is that it does not have “Social and Economic Well-being Target”, neither it helps to stimulate growth, as only tiny amount is allowed for spending purpose to settle debt related payments.

IMF loan has not helped to reduce domestic social unrest. Sheer purpose of reckless borrowings is to show support to weak balance of payment position and to allow showing of fat FX Reserve position, which also causes economic stress.

To give a perspective, the impact of IMF loan taken during Musharrf’s era ended successfully. But in his later days, it was his weak economic policy that had costed him the elections.

Prior to 2008 elections his economic policies of previous two years got Musharraf burst due to Depreciation of Rupee, while, FX Reserves fell by nearly USD 12 Billion to USD 4.68 Billion, which was good enough for 2-months import. Policy Discount Rate was raised to double digit. Petrol prices were raised by more than 20 pct that added pressure on electricity rates, hence, transportation charges were hiked in same proportion that added pressure on essential food items.

Similarly, declining economic condition during PPP’s 5-years rule added pressure in 2013 election, as Rupee during that period was depreciated by nearly 55 pct that had sharply pushed Total Debt higher. Debt Servicing cost skyrocketed and Private Sector Lending was clogged, as in January 2011 the government was responsible to Hike Policy Discount Rate to 14 pct.

But the deteriorating economic condition during Musharraf’s tenure was possibly due to impact of rising oil prices that kept on climbing from 2003 to 2008 by more than 300 pct i.e., from USD 28 per barrel to peak in July 2008 to USD 145.85 per barrel resulting sharp fall in Pakistan’s FX Reserves.

While, PPP government though eased Policy Discount Rate to 10 pct before elections, it did not realize that it was getting cornered due to extremely rigid IMF lending conditions as they demanded tougher austerity measures that did not help to provide clean lending to Private Sector as it was simultaneously asking to contain deficit, so banks are encouraged to invest in government paper.

Unfortunately during that period due to lack the economy could not benefit from average 140 pct rise in Global Commodity prices and neither the economy could gain from 20-25 pct fall in oil prices.

Conclusion : Challenges & Opportunity

Meanwhile, present government did manage to meet donors (IMF) demand by almost attaining the required numbers. But the large part of country’s population is deprived from economic gains. The price paid to meet donors target is very high, as Foreign Currency loans acquired have surpassed USD 27 Billion.

At its current pace we estimate that by the end of FY 2018, combined Domestic and External Debt is likely to end up around Rs 24 Trillion, while annual Debt Servicing could reach Rs 1.7 Trillion and further Rupee Depreciation will add to the annual financing cost.

The point is that the Rural Voters are least bothered about higher GDP Growth, Low Inflation Rate, high number of Car Sale, boom in Energy Sector or heavy demand for Cement.

Nor they are keen about S & P, Moody’s or Bloomberg forecast. All they want is easing of Petrol & Electricity rates, cheaper transportation cost or affordable essential items of daily use such as Wheat/Bread, Rice, Ghee, Sugar, Lentils and Vegetables.

As election is approaching government is presently faced with a formidable task to manage economy, which looks brittle. Therefore, for the present government the challenge until coming elections is immense, which is required to make calculated moves to keep its core voters intact or else any type of erratic or complacent approach could easily backfire.

However, lessons can be learnt from past trend, as government’s present stance suggest that it is well aware of the heavy price it may have to pay in coming elections if it tries to bring aggressive economic changes. They look determined and are unlikely to bring major policy shift.

Instead, there is a good possibility of friendlier economic approach, as National Budget is due only after 2018 elections. This means they will opt for stable Pak Rupee, cheaper Petrol prices and possibly further easing of electricity rates. Exports are likely to do better than last fiscal year. Focus could be on increasing direct Tax Collection, which will not hurt the Rural Voters.

However, Rating Agencies and Banks will largely focus on all types of risk factors. Fiscal slippages too will be keenly watched, which means all eyes will be on Balance of Payment.

If government is unable to Rollover/arrange funds and FX Reserves continue to decline, I will not be surprised to see a friendly country hoping in to assist the present government with short term funding offer.

Credit Default Swap (CDS) is another key benchmark to monitor country risk, which are currently priced 306 for 5-years. Higher number indicates increase in risk, lower is good.

In all probability, political uncertainty will witness slowdown in stock market trading volumes, as exuberance of foreigners will thin down due to changing political environment.

While, Banking and Financial sector, which is the major market players/mover will take calculated risk, which means less aggression on their part.

Therefore, instead of one sided uptrend, profit taking at quicker pace will be often seen. Hence, choppy market condition to prevail until elections.

(Disclaimer applies in my post, which means that the perspective is my personal view. I have made every effort to ensure accuracy of information provided. However, accuracy cannot be guaranteed. This article is strictly for information and not intended for Trade or Business Transaction). 

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