Monthly Archives: February 2024

The economic watch is highly anticipated next week as all interest is on how the elections will unfold. We will take the opportunity to discuss Pakistan’s weak growth as one of the challenges affecting the economy after inflation.

We will also explore why reforms are required and identify global factors that could potentially harm Pakistan the most.

Table 1: GDP Growth Rate (World Bank)

Table 2: Economic Outlook and Challenges Report

Table 3: Export Projections (IMF)

Table 4: Remittances, World Bank Forecast for 2024

Table 5: Global Factors Impacting Remittances in 2023

Summary Table: Risks Without Reforms

Global Factors Table

(The writer is a Former Chairman and Managing Director PIA, Former Federal Minister of industries and production)

Pakistan Growth Story in Tables

It is by now obvious that the party pooper in the country is inflation. Not only does it refuse to go away, but all other policies are directed towards normalizing it. It’s a global problem, with most economies prioritizing inflation over economic growth.

Impact on FX:

When the Rupee depreciates, it adds to the imported inflation component. To avoid this, a policy of a stable to stronger local currency has been adopted. This is part of the established ‘reverse currency wars’ we have written about earlier, with the objective to keep a lid on inflation.

The fiscal year started with USDPKR at 286. Judging by historic trends, an annual depreciation of 7-10% is typical, which supports the exporters and maintains REER near par. This would imply that June-end closing rates would be around 310/$. As of today, the Rupee is actually stronger by around 2%, and depreciation looks unlikely.

The new incoming government is unlikely to rock the boat unless inflation cools down significantly. Consequently, the Rupee is headed towards a soft close by June 24 end.

Exporters, who are now fiercely competing global manufacturers, and also facing domestic conditions like escalating cotton prices, energy, and labor costs, are taking the extraordinary risk of selling dollars forward to hedge their sales and give competitive prices. Though there is a slowdown in forward booking, it is still being done by larger exporters.

There also seems to be a concerted effort to keep swap premiums high amidst declining interest rates to support forward selling. SBP’s aggregate swap positions have reduced to $3.2bn from $4.5bn on June 23.

The stable currency has prompted higher trading numbers, business confidence, a robust stock exchange, and an inflow of portfolio investment. Month-to-date inflows are around $46 million, with about $19 million coming through the purchase of T-Bills by foreign investors.

Impact on Policy Rates:

In a poll conducted by Tresmark, 83% of participants do not expect any rate change in the upcoming MPC on January 29. In fact, the majority think there will not be any rate cut for another 2 months.

Here too, the party pooper is to blame. While the SBP has projected inflation to come down drastically, the revision in energy prices and fuel prices will keep inflation at elevated levels.

Turkey’s Inflation Problems:

Turkey increased its interest rates from 42.50% to 45%. Please read that again – 45%! And yet, its inflation has increased MoM and now soars to 65%. Part of their inflation problem is the spiraling currency. In spite of all the adjustments, Lira continues to fall, hitting an all-time low of 30/$ last week.
One of the main consequences of this devaluation is inflation – and lots of it. It is evident that since the people don’t trust the currency, any practical amount of rate hikes will not have a substantial impact.

Perhaps, they should look into reverse currency wars and find a way to strengthen their currency to address runaway inflation.

(The writer is a Former Chairman and Managing Director PIA, Former Federal Minister of industries and production)

The One Party Pooper

Most of my readers are asking, “Where is the Rupee headed, and how to trade it?” There is no doubt that USDPKR is headed below 280, but how low can it go and in what time frame?

Arguments for a stronger Rupee:

1. The biggest clue is the mystery inflow in reserves. The fact that the reserves rose by about $1.2bn may not be as important as the source of these inflows. The inflow from untold sources indicates that Pakistan is still relevant in the global power lane. It also almost ensures that the IMF BoD will approve the upcoming tranche. And lastly, it also erodes the potential repercussions of whether elections will happen on time or not.
2. Post IMF approval, inflows from multilaterals will become bigger and quicker.
3. The trade deficit has narrowed to $1.7bn, thereby raising expectations of another month of the current account surplus. In addition to this, there is more inflow in SCRA related to PSX, indicating better liquidity levels.
4. Pakistan’s major fight is against inflation. A stronger Rupee keeps price hike expectations checked. The government will want to continue this policy.
5. SIFC decides to take action against smugglers, hoarders, and market manipulators. This too will keep a lid on price pressures and inflation.
6. Secondary market bond yields have declined, indicating potential interest rate cuts by March ’24 amidst expectations that inflation will come down.
7. If inflation trends lower in Jan, REER will be more or less contained.
8. Pakistan’s CDS is consolidating to pre-crisis levels, and Euro bonds have rallied.
9. Last week, we saw increased activity by exporters to sell dollars forward, mostly within the 60-day window, indicating the market’s view of Rupee stabilization.
10. Lastly, Fed’s indication of cutting rates has mitigated liquidity and funding concerns of Emerging Markets.

The one big risk to Rupee is the increasingly turbulent Gaza conflict. Israel has suddenly raised the geopolitical stakes in the Middle East by the targeted assassination of Hamas’s de facto ambassador to Hezbollah, followed by twin suicide attacks on the funeral. Taking turns, Iran has now vowed to take revenge.

Conclusion:

Exporter concerns will cap the Rupee rally. We see the Rupee to test its highs of 277/$ before the end of this month.

US NFP data out:

The U.S. added 216,000 jobs in December. The growth surpassed the forecasts of many economists and exceeded November’s revised gain of 173,000. Nonfarm payrolls rose by 2.7 million for all of 2023, with an average monthly gain of 225k jobs, much higher than the median expectation of 173k.

This has increased the uncertainty into what awaits in the year ahead, but there’s still a growing consensus building that the Federal Reserve will start cutting interest rates as soon as March this year.

Next week’s consumer inflation report for December (Jan. 11) may clarify expectations.

The dollar’s weakness comes after a strong start to the year as high expectations for a significant dovish shift by the Federal Reserve eased.

Investors have been a little more doubtful so far this week about whether the potential rate cuts will match the market’s high expectations. The market anticipates up to 160 basis points in cuts this year, double the Fed’s projection. Some investors feel that the market may be overestimating the rate cuts and are thus reversing their trades or taking profit on long-risk positions.

(The writer is a Former Chairman and Managing Director PIA, Former Federal Minister of industries and production)

Where is Rupee headed?