Macro Analysis /
Pakistan

Pakistan Economy – MPS: Another rate hike but the IMF is still missing

  • The SBP has increased the Policy Rate by 100bps to 17%, on persistent inflation and a challenging external account

  • Given the quantum of the rate increase is not a surprise, we expect the KSE100 to deliver a muted response

  • Completing the 9th IMF review remains critical, which can help fill the funding gap across 2H FY23

Raza Jafri
Raza Jafri

Executive Director, Research

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Intermarket Securities
23 January 2023

In line with expectations, the SBP has increased the Policy Rate by 100bps to 17%, with an upward drift in inflation expectations and a challenging external account more than offsetting slower growth. The SBP has also urged for a better fiscal response and the completion of the 9th IMF review, which can reduce uncertainty and help to fill the funding gap across the remaining months of FY23.  Given the quantum of the rate increase is not a surprise, we expect the KSE100 to deliver a muted response.

The SBP has increased the Policy Rate by 100bps to 17.0%, to bring it near the last national-level core inflation print of 17.1%. The stated reasons behind the increase include an upward drift in inflation expectations, and a challenging external account position. Although there are downside risks to the FY23 GDP growth projection of 2% and PMI readings are already below 50, the SBP felt it was important to signal the need for prudence. We believe the SBP will continue to be guided by core inflation when setting interest rates across FY23.

The monetary policy statement contains several recommendations. These include:

-          Effective implementation of energy conservation measures and appropriate pricing of petroleum products, to reduce energy imports

-          Completion of the pending 9th review under the IMF’s EFF, to reduce uncertainty and unlock other multilateral and bilateral inflows

-          Better alignment of the fiscal stance with monetary tightening, which can help contain inflation and deliver sustainable growth.  

The SBP also gave detailed color on principal external debt repayments, which amount to US$8bn across the balance of FY23 (see table on next page). These will likely be funded by a mix of further bilateral assistance (rollovers + new commitments) and multilateral disbursements. The resumption of the IMF programme remains critical to meet the funding gap. We believe a larger follow-up IMF programme, once the current one ends in June, is inevitable.

Given the 100bps rate hike is in line with market expectations, we expect equities to deliver a muted response, especially as the external account remains much more important in the near-term. Continued policy inaction by the government will likely continue to weigh down on equities, notwithstanding the ultra-cheap valuations (forward P/E is less than 4x vs. a 10yr average of about 8x). On the flipside, an end to the current policy paralysis by fully implementing IMF conditions or calling early elections, can help the KSE100 find a foothold. Given the import cover is down to just 3 weeks, greater urgency is needed.