Latest IMF deal of $7 billion will have a positive impact on Pakistan's capital markets

Latest IMF deal of $7 billion will have a positive impact on Pakistan's capital markets

By: Communicators - Business Team (July 14, 2024) 

The recent staff-level agreement between Pakistan and the International Monetary Fund (IMF) on a $7 billion extended fund facility (EFF) is creating a positive buzz in Pakistan's capital markets. This 37-month deal, pending approval from the IMF Executive Board, is expected to have several significant impacts:

1. Stock Market Surge: The stock market is anticipated to rise beyond its recent high of over 81,000 points, driven by renewed investor confidence.

2. Rupee Stabilization: The Pakistani rupee is forecasted to stabilize at around 278 per US dollar in the short to medium term of the fiscal year 2025.

3. Additional Funding: The agreement is likely to unlock further funding from other multilateral and bilateral creditors such as the World Bank and Saudi Arabia.

4. Foreign Investment: An influx of foreign investment, especially in local sovereign debt instruments (T-bills) and the equity market, is expected. This 'hot money' will help boost the country’s foreign exchange reserves.

Overall, the agreement is being seen as a major step towards economic stabilization and growth, fostering a more favorable environment for investment and financial stability in Pakistan.

The outlook for the Pakistan Stock Exchange (PSX) indeed looks promising. An expected immediate increase of 1-1.5% (800-1,200 points) reflects positive market sentiment, likely in reaction to a recent agreement or significant development. So we can have:

• Immediate Increase: The benchmark KSE 100 index is expected to see a rise of 1-1.5% (800-1,200 points)

• Recent Highs: The KSE 100 index is anticipated to surpass its recent intra-day all-time high of 81,087 points.

• Full-Year Projection: For the fiscal year 2025 (FY25), the index is projected to deliver a return of 38-40%, potentially reaching over 110,000 points by the end of June 2025.

This optimistic outlook can be attributed to favorable economic conditions, investor confidence, and potential positive impacts from the recent agreement. The projected growth highlights a strong performance trajectory for the PSX, making it an attractive prospect for investors.

The Pakistani Rupee (PKR) is anticipated to maintain stability around Rs278/$ in the short to mid-term (three to four months). This projection is supported by positive sentiment stemming from a new program, which has bolstered confidence in the currency. Key factors contributing to this stability include:

• IMF Staff-Level Agreement: The early agreement with the IMF has created a conducive environment for the rupee's consolidation.

• Increased Hot Money: Expectations of inflows of hot money are likely to support the currency.

• Additional Multilateral Inflows: Enhanced multilateral funding will provide further backing to the rupee.

• Higher Export Proceeds: An increase in export earnings will strengthen the rupee's position.

While the equity markets, already near record highs, might receive an extra boost from these positive developments, the rupee is not expected to see substantial appreciation beyond the Rs278/$ level. To summarize:

1. Rupee's Performance:

   • The rupee appreciated by 10.85% from Rs307.10/$ in early September 2023 to Rs277.03/$ by late March 2024.
   • It slightly depreciated to Rs278-278.63/$ but has remained stable around these levels since then.

2. Future Expectations:

   • Initial expectations were for the rupee to devalue starting in July 2024 due to increased imports and foreign debt repayments of about $24 billion in FY25.
   • The staff-level agreement has mitigated immediate devaluation pressures, extending the rupee’s stability phase until October-December 2024.

3. Economic Reforms and Goals:

   • Pakistan aims to increase its tax-to-GDP ratio by 1.5 percentage points in FY25 and by 3 percentage points over the 37-month Extended Fund Facility (EFF) period.
   • Recommendations include avoiding unnecessary power generation capacity, adjusting energy prices, improving SOEs, strengthening monetary and fiscal policies, increasing social spending through the Benazir Income Support Programme (BISP), and boosting economic activities and growth.

The stringent program outlined involves various measures aimed at improving fiscal operations, including:

• Imposing Taxes: On sectors like agriculture, real estate, wholesale, and retail.

• Adjusting Power and Gas Prices: Regularly increasing prices to cut subsidies.

These measures are expected to have several impacts:

Economic Growth and Inflation

• Growth Rate: Economic growth in Pakistan is expected to remain moderate at 3-3.5% in FY25.
• Inflation: Inflation expectations have been revised upward to 13-16% in the short term, driven by surges in milk and energy prices.

Imports and Foreign Exchange Reserves

• Imports: The import of goods and services is projected to stay low, around $4.5-5 billion per month, due to government controls on overseas purchases.
• Foreign Exchange Reserves: Currently at $9.40 billion, providing less than two months of import cover.

Future Prospects

• Economic Activities: Expected to gradually improve after receiving the IMF’s first tranche and additional inflows from other multilateral and bilateral creditors.

The fiscal measures, while aiming to stabilize the economy, might also restrain it from achieving its full growth potential in the short term due to increased taxes and higher costs of energy.

This new Extended Fund Facility (EFF) with the IMF represents a critical step for Pakistan in achieving sustained macroeconomic stability. By addressing public finance issues, inflation, external buffers, and economic distortions, the program aims to foster a more stable and conducive environment for growth and investment.

Sectoral Impacts at the Pakistan Stock Exchange (PSX):

Energy Sector:

• Oil and Gas Exploration Firms (E&P): These companies are likely to benefit from improved investor confidence and potential increases in exploration and production activities.

• Oil Marketing Companies (OGMCs): Enhanced stability and potential regulatory reforms could boost the profitability and operations of OGMCs.

• Power Sector: Increased focus on energy could lead to better efficiency and investment in infrastructure, benefiting power generation and distribution companies.

Sectors with Low Utilization:

• Cement: Increased infrastructure projects and economic activities could lead to higher demand for cement, improving capacity utilisation and profitability.

• Automobiles: With better economic conditions and consumer confidence, the auto sector might see a rise in demand and utilisation rates.

• Steel: As construction and manufacturing activities pick up, the steel sector could experience higher demand, leading to improved utilisation.

• Pharmaceuticals: Improved economic conditions and potential health sector reforms might enhance the profitability and operational efficiency of pharma companies