Updated: 25 March 2019.
This presentation was specifically prepared for a discussion at HBL, with its senior management and stakeholders. It builds on recent papers and presentations that have been shared with our clients.
This partial equilibrium assessment is anchored on supply-push factors that determine inflation in the country. More specifically, we argue that the urgent need to narrow the trade deficit (given the ineffectiveness of past policies) implies that the currency would have to be further adjusted (and less strictly managed) and retail fuel prices would have to be increased.
These price adjustments would directly impact the food, utility and transportation sub-indices, which account for over 70% of the CPI basket. We project YoY inflation could be 12.4% by end-June 2019, while average inflation for the full year (FY19) could settle at 8.0%. This inflationary momentum would remain in play till mid-2020. We argue that the IMF program (and prior actions) would stoke the inflationary trend, but this is the lesser of two evils. The real concern is what happens to interest rates.
We argue that an orthodox approach to stabilization (i.e. increasing interest rates to keep pace with rising inflation) would: (1) create more debt servicing pressure; (2) keep the country’s market debt primarily in 3-month T-bills; (3) force GoP to continue borrowing from SBP; and (4) threaten commercial banks’ balance sheets. None of these would help stabilize the economy.
This creates an awkward trade-off: policy orthodox vs. actual stabilization.
This presentation was given to familiarize a visiting delegation from Mitsubishi Corporation about Pakistan’s economy.
This presentation was prepared for Engro Corporation, to assist with its planning for 2019.