Macro Analysis /

Pakistan Economy: CAD is stabilising but IMF programme is still a must

  • Pakistan’s CAD has come in at US$1.0bn for March 2022, which annualizes to 4% of GDP, inline with projections for FY23.

  • The IMF is still needed and the new government is rightly focusing on quick programme resumption.

  • Alleviating BoP concerns can help both the PKR and Pakistan equities stage a rebound in the near-term.

Raza Jafri
Raza Jafri

Executive Director, Research

Intermarket Securities
25 April 2022

C/A deficit at US$1.0bn in March

Pakistan’s current account deficit (CAD) has come in at US$1.0bn for March 2022, double the previous month’s reading, but still much lower than the monthly average of US$1.6bn of the last six months. As a result, the 9MFY22 CAD has come in at US$13.0bn which annualizes to 6% of GDP. The IMF expects the CAD to come off to 4% of GDP in FY23.         

Key takeaways the March CAD print include:

  • Goods exports of US$3.1bn, up 17% yoy / 6% mom, the first time that the reading has crossed the US$3bn mark in a month. Services exports have clocked in at US$0.7bn, up a strong 20%yoy, pushed up by the IT sector's continued stellar performance.

  • Good imports of US$6.2bn, up 16% yoy / 21% mom. As per the SBP, except for Food imports (down 21% mom), all major imports increased mom, particularly Petroleum imports which were up 49% mom.

  • As a result, the goods trade deficit stood at c.US$3.2bn in March, broadly inline with the average of the last six months.

  • Remittances remained elevated and increased to a record level of c.US$2.8bn (up 28% mom). This is due to Ramadan and pre-Eid seasonality. Cumulatively, remittances have risen 7% yoy to US$23.9bn in 9MFY22.

IMF programme resumption is near

SBP’s Forex reserves are down to the lowest levels since May 2020, at US$11.4bn by the end of March, compared to US$16.4bn by the end of February. This translates to an import cover fast approaching two months, which has prompted the new government to quickly approach the IMF and salvage the EFF programme. We understand that the EFF programme has been extended until June 2023, from September 2022 previously, while news reports indicate that the programme size has been increased by US$2bn to c US$8bn. An IMF mission will visit Pakistan in May to conclude the seventh review.

Successful programme resumption may entail completion of the following steps:

  • Reverse the subsidies on petroleum products and electricity

  • Take the IMF's input on the FY23 budget

Other steps that may need to be taken for the continuation of the IMF programme until it ends in June 2023 may include: (i) transferring export refinance facilities to a dedicated DFI, (ii) completing the first stage recapitalization of two private sector banks, and (iii) making changes pertaining to Personal Income Tax.

Market outlook

The likely resumption of the IMF programme should unlock financing from other multilateral sources such as the World Bank. It may also dovetail with support from China (debt rollover) and GCC countries, where Prime Minister Shehbaz Sharif is expected to be in Saudi Arabia later this week. Strong funds inflow should arrest the nascent Balance of Payments concerns, help the PKR consolidate, and shore up investor confidence, which can combine to lift Pakistan equities. In this regard, although the end to petroleum subsidies will likely push inflation to more than 15% in the near-term, the SBP may choose to focus on its FY23 inflation projection of less than 11%, and keep the policy rate at 12.25% across the remainder of 2022. Alleviating concerns on the balance of payments front support our constructive outlook on Pakistan equities. The IMS Universe trades at a forward P/E of 4.9x, at a c 40% discount to the historical mean (this discount magnifies to 60% compared to regional multiples). Our top picks include LUCK, UBL, FFC, SYS and ILP.