Sovereign Analysis /

Our discussion with the State Bank of Pakistan

  • SBP thinks recent rate hike will be enough to tame inflation and external imbalances, but stands ready to act if needed

  • Recent reserve drop expected to be temporary and funding pipeline is sufficient to meet large external financing needs

  • We see risks to funding pipeline and think IMF programme and FX depreciation will be needed to avoid a BOP crisis

Our discussion with the State Bank of Pakistan
Tellimer Research
18 April 2022
Published byTellimer Research

We hosted a webinar on 14 April with State Bank of Pakistan Deputy Governor Murtaza Syed. We thank Dr Syed and the rest of the SBP team for their time. Our key takeaways are outlined below – these words are our own and not those of the SBP.

The presentation is available for download here:

Download .pdf
The SBP hiked its policy rate by 250bps on 7 April, the last in a series of measures implemented since September to moderate domestic demand, which has included a clampdown on consumer financing, increased cash requirements, and 525bps of cumulative rate hikes.

While SBP Governor Baqir had said last week that the SBP was “not planning to do anything more,” Dr Syed emphasised that the SBP stands ready to act with further hikes if inflation does not evolve in line with its forecasts.  

Food and energy prices have been the main contributors to inflation, comprising two-thirds of the current 12.7% yoy inflation rate, but core did tick up in March. That said, Dr Syed was encouraged by survey-based indicators of expectations, which have been relatively stable since September.

On the balance of payments front, the SBP has retained its 4% current account deficit forecast for FY21/22 despite rising pressure from high food and fuel prices. It is projected to moderate further to 2-3% of GDP in FY22/23, which is deemed to be a manageable deficit.

The current account has widened to US$12.1bn over the first 8 months of FY21/22, but falls to just US$1.4bn if you exclude oil. Indeed, 60% of the increase in imports over this period has been due to oil and Covid vaccines, and only 20% has been driven by rising import volumes (with import volume growth actually turning negative in January and February).

Remittances have also prevented a worse deterioration in the current account. While they are expected to register more moderate growth rates of 5-10% moving forward after strong growth last year, Dr Syed does not expect them to decline and sees significant opportunity to increase inflows through Roshan Digital Accounts (and indeed, remittances rose to a record US$2.8bn in March).

That said, many clients (and ourselves) expressed concern about Pakistan’s falling reserves and large external funding needs, which the SBP estimates at US$45bn over the next 15 months. Dr Syed expressed confidence that its financing needs could be met, with much of its US$45bn pipeline pertaining to bilateral credit that is expected to be rolled over.

The recent reserve drop (down cUS$7bn ytd to below US$11bn on 8 April) has been driven by the repayment of US$4.4bn of debt to China and Saudi Arabia, and the SBP said that, of this, US$2bn has already been confirmed for renewal and another US$2bn is in the final stages, which should provide a boon following the alarming decline we have seen of late.

That said, some clients expressed doubts about the reliability of financing estimates, especially the roughly US$5bn portion expected to come from the market at a time when Pakistan has double-digit yields. Some of the financing is also tied to a resumption of the IMF programme, meaning it could be at risk if the seventh review is not completed.

On this front, Dr Syed expressed optimism that the review would soon be completed after it faced delays due to political uncertainty. The new government is committed to the programme and has been in continued contact with the IMF, and is considering a review of the recent subsidy package that has likely been the root cause of any possible policy disagreements with the IMF.

As before, we think that resumption of the IMF programme is necessary to avoid a balance of payments (BOP) crisis. While we are, as usual, encouraged by our discussion with the SBP and the sense of confidence that they convey, we need to see tangible evidence that the programme is back on track and that it is able to tap sufficient external funding before we turn positive.

Likewise, we will keenly watch the trade and current account data in the coming months for signs that the recent monetary tightening is beginning to bring down import demand. The contraction of the current account that we saw in February is encouraging, but if it is only an aberration and returns to pre-February levels then more urgent action will be needed to avoid a BOP crisis.  

Beyond monetary policy tightening, the SBP maintains that it is fully committed to a flexible exchange rate, which should also serve as a buffer if pressures persist. We noted with curiosity that the PKR is down only 3% ytd despite rising external pressures and 12-month NDFs pricing in a 28% depreciation, but the SBP maintains that it has not intervened to support the currency.

Overall, we think further PKR weakness and a resumption of the IMF programme are necessary to avoid a BOP crisis, but are encouraged by the SBP’s recent steps to tighten policy and will closely monitor the impact on inflation and the current account in the months ahead.

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