Have A Question? +92 21 3584 5057

Pakistan’s economic flux is not business-as-usual

(January 07, 2019)

On 26 December 2018, the Pakistan Investment Bond (PIB) was resurrected.  The authorities finally decided to accept more expensive money, borrowing 3, 5 and 10-year money at rates that reflect the 50% increase in the discount rate during 1H-FY19.  With inflation much lower than market expectations, this hike is driven by the urgent need to shift Pakistan’s market debt into longer-term maturities.  We also argue that the government is using soft oil prices to reduce retail fuel prices, to dampen food and transportation costs, and keep a cap on headline inflation.  If inflation in FY19 settles at a lower level than previously anticipated, and banks shift into longer-term PIBs, we think the monetary tightening phase may be almost over. 

With a mini-budget expected in mid-January, we propose that several key uncertainties be addressed.  First, we discuss the need to confirm the start date of the IMF program to provide some confidence to the market.  We also argue that new revenue measures should focus on those who do not pay taxes, which means the government must maintain pressure on non-filers.  As a matter of housekeeping, we suggest that the government should clarify how Pakistanis with overseas assets could regularize their wealth, and reaffirm its commitment to continue the anti-corruption and anti-encroachment policies despite the economic dislocation.  We argue that accountability and documentation are key economic goals the government should stand by.  However, these policies do not give the economy much direction: to address this, we suggest that the PTI government should announce an economic vision that builds on manufacturing, upgrading our labor force, and using CPEC to anchor Pakistan’s development agenda.  Word Count: 3,649.  

Download

Summary of 2018

(December 27, 2018)

In this paper, we summarize the main developments of 2018.  The narrative shows the mounting pressure on the external sector, and hesitant policy steps to rectify the problem.  While the new government’s tenure has seen significant changes in the PKR and interest rates, there is no clear signal as to when Pakistan will enter the IMF program.  This failure to calm the markets resulted in a bearish end to the year. 

However, we take heart from the on-going accountability drive, as this dovetails into the economic stabilization program.  We argue that the government may use its January mini-budget to change the tone on what it seeks to achieve in 2019.  As the country gears up for the IMF program, the government should reiterate its commitment to accountability and documentation, and announce other policy measures that will support this strategy.  This policy focus will increase the chances of a successful program.  While economic growth will surely suffer, the government should take advantage of this commercial lull to push against capital flight; create a digital record of individual asset holdings; move towards more accurate valuation of real estate; and create revenue measures that capture new payers.  We conclude by saying that global changes in 2019 are likely to be far more unsettling, compared to the short-term pain that Pakistan is likely to experience next year.  Word Count: 5,597.  

Download

Q2-FY19 Macro Projections: The near impossible balancing act

(December 03, 2018)

We delayed this piece hoping for more details on the forthcoming IMF program.  After the shock PKR adjustment on November 30, we decided to go ahead as we don’t expect program details till mid-to-late January 2019.  Letting the exchange rate go on the day of the monetary policy decision, and the larger than expected increase in interest rates (150 bps), has convinced the market that November 30 is a prelude to the next program.  We look at Egypt’s experience with the IMF in 2016 to show that the initial stages of stabilization can be very disruptive, but argue that Pakistan’s experience should not be as painful. 

In terms of the next program, we highlight the targets on SBP’s net international reserve (NIR), which could put further pressure on the PKR/$ parity.  However, we think that most of the heavy lifting has already been done.  We had anticipated a parity of 140-141/$ by end-June, but the November 30 event has pushed up our projections to 145-146/$ by end FY19.  Compared to our previous projections, this means higher inflation, more monetary tightening, a larger fiscal deficit and lower growth.  While this will dampen economic sentiments, if the stabilization is properly managed, GoP should be able to move on more meaningful structural reforms.  If the stabilization is disruptive, tough reforms will be postponed (again).  Word Count: 4,542.

Download

IMF negotiations with a Twist

(November 09, 2018)

As Pakistan negotiates its 13th IMF program since 1988, the market’s response has been mixed.  Assistance from Saudi Arabia has shored up the PSX, but the market has been disappointed by the Chinese offer to discuss Pakistan’s economic needs.  We argue that China’s response reveals that it is looking out for its substantial CPEC investment, but this is also the correct path forward for Pakistan.  To make CPEC financially viable, China will want to ensure that Pakistan’s macro economy is structurally strengthened.  This IMF-plus package should dispel the view that CPEC is self-serving, and push our policymakers to implement hard reforms. 

In September 2017, we had suggested that the best outcome for CPEC would be a scenario whereby China helps build Pakistan’s repayment capacity, in conjunction with a strictly implemented IMF program.  In our view, this is playing out.  However, it is important not to view the IMF’s concerns about CPEC as a geopolitical strategy to undermine our economic relationship with China.  We argue that China would encourage Pakistan to undertake hard reforms, and Chinese assistance would be a combination of rescheduled loan repayments and structural changes to narrow Pakistan’s bilateral trade deficit.  We repeat five areas of policy focus, and urge the government to adopt an unorthodox strategy to achieve results. Word Count: 2,488.

Download

Khashoggi’s murder is a point of no return

(November 01, 2018)

The premeditated murder of Jamal Khashoggi has split the Middle East.  Turkey is pushing to undermine the House of Saud, sensing that this will weaken US policy in the Middle East and isolate Israel.  These forces could change regional dynamics in favor of Iran.  Given the stakes in the Turkey-Saudi standoff, this issue will not go away till the Saudi crown prince (MBS) is removed.  If this happens, the kingdom’s foreign policy will become less aggressive, which may put an end to the war in Yemen and tone down the anti-Iran rhetoric.  In our view, as Turkey and Iran are in the same coalition in the new global order, Turkey may use this momentum to bring Iran back into the fold of the global community. 

This standoff should be viewed in context of the current situation in the Middle East.  Yemen, Libya, Iraq and Afghanistan are already unstable; if the kingdom falters, this will impact the rest of the Middle East.  This regional instability worries the US establishment, which may take charge of US policy towards Saudi Arabia – President Trump may also lose interest closer to his reelection campaign in 2020.  We end by saying that the uncertainty in the Arab world will not adversely impact Pakistan – despite the $ 6 bln aid package from the kingdom, we do not expect Pakistan to take sides.  Word Count: 4,430.

Download

The Last IMF Program?

(October 18, 2018)

After a hesitant start and some missteps, PTI’s economic team took two meaningful steps in mid-September 2018.  It announced a progressive increase in gas tariffs, and presented a mini-budget to reverse the previous government’s short-lived tax cuts before the July elections.  Since then, the government has conceded that it will be approaching the IMF for a bailout; increased interest rates by more than the market expected; and allowed the PKR/$ parity to depreciate to 133.7/$. 

Clearly the country has a hard year ahead.  Many are skeptical that much will change in the next IMF program.  However, we believe the PTI’s political mandate and the publication of a list of Pakistanis who own properties overseas, suggest that the government will pursue an anti-corruption drive.  We suggest that this disruptive process be embraced with a political strategy to overcome the economic dislocation.  Using the chronic circular debt problem, we remind readers just how difficult structural reforms are.  We then suggest four additional goal-driven endeavors: (1) documentation and revenue generation; (2) external sector sustainability; (3) the need for an industrial policy; and (4) regulatory and institutional strengthening.  Unlike past reform efforts, we propose a reform oversight mechanism headed by Czars, who spearhead each of these areas and keep the country abreast of progress.  We conclude that reforms of this nature cannot be conducted in a business-as-usual manner.  If the government pursues these reforms with political commitment and generates public support for such changes, the next IMF program could be Pakistan’s last.  Word: 6,074.

Download

Deceptive choices

(September 04, 2018)

Although the political landscape has settled, the economic picture remains confusing.  Media coverage shows that the government has yet to decide whether to approach the IMF.  We suggest there is further confusion: will the government focus on economic relief or macro stabilization?  Will the government impose hard reforms or seek a consensus?  With a record high external deficit in July 2018, the decision to cut retail fuel prices on 1 September, was perhaps not the right signal.  Furthermore, a parliamentary debate about whether Pakistan should approach the IMF is ill-advised, as the newly elected parliament would not want to lose policy sovereignty.  Finally, debating the direction of economic reforms with Pakistan’s status quo, is a non-starter.

These deceptive choices are not addressing the deteriorating balance of payments (BoP) position.  We argue that Pakistan needs both the IMF and assistance from China; it needs to signal that stabilization is more important than temporary relief; and PTI needs to follow its campaign promise of change, and not settle for negotiated reforms.  Bold policy steps are likely to be positively received and will set the right tone for the new government.  With a monthly reminder of Pakistan’s vulnerability coming from SBP (BoP data), the current macroeconomic calm cannot be taken for granted, especially against the backdrop of jitters in Emerging Market countries.  Word Count: 3,754.

Download

The Challenges Facing Pakistan’s Economy

(August 15, 2018)

This comprehensive paper was commissioned by the Asian Development Bank, Islamabad.  We argue that the various macro challenges facing Pakistan can be traced largely to short-term policymaking and weak state institutions.  In terms of a solution, we argue that returning to the IMF would have to be supplemented with more customized steps to: (1) accurately document all real estate holdings in the country; (2) make the Amnesty Scheme more effective; and (3) talk with our Chinese partners to rethink the focus of CPEC and narrow our bilateral trade deficit via the China-Pakistan FTA.

In a series of standalone boxes, we talk about: (1) poor policy oversight because of a politicized bureaucracy; (2) the need to pursue accountability even if it temporarily disrupts the economy; (3) how CPEC could play out; and (4) how it is in Pakistan’s interest to adopt FATF guidelines, not just to get off their grey list, but to better manage the Rupee.

With on-going developments, we discuss PTI’s election victory, and the US government’s effort to politicize the IMF and CPEC.  We propose possible first steps for the new government, with a specific emphasis on working with both China and the IMF to stabilize the country’s economic outlook.  We dismiss the likelihood that US pressure could make the IMF unapproachable.  We conclude that it is too early to decide whether the PTI government is willing to implement disruptive reforms to cleanse out the system, or settle for a gradualist approach that may not deliver results.  Word Count: 14,710.

Download

Q1-FY19 Macro Projections: The Challenges Facing Pakistan’s Economy

(August 15, 2018)

This comprehensive paper was commissioned by the Asian Development Bank, Islamabad.  We argue that the various macro challenges facing Pakistan can be traced largely to short-term policymaking and weak state institutions.  In terms of a solution, we argue that returning to the IMF would have to be supplemented with more customized steps to: (1) accurately document all real estate holdings in the country; (2) make the Amnesty Scheme more effective; and (3) talk with our Chinese partners to rethink the focus of CPEC and narrow our bilateral trade deficit via the China-Pakistan FTA.

In a series of standalone boxes, we talk about: (1) poor policy oversight because of a politicized bureaucracy; (2) the need to pursue accountability even if it temporarily disrupts the economy; (3) how CPEC could play out; and (4) how it is in Pakistan’s interest to adopt FATF guidelines, not just to get off their grey list, but to better manage the Rupee.

With on-going developments, we discuss PTI’s election victory, and the US government’s effort to politicize the IMF and CPEC.  We propose possible first steps for the new government, with a specific emphasis on working with both China and the IMF to stabilize the country’s economic outlook.  We dismiss the likelihood that US pressure could make the IMF unapproachable.  We conclude that it is too early to decide whether the PTI government is willing to implement disruptive reforms to cleanse out the system, or settle for a gradualist approach that may not deliver results.  Word Count: 14,710.

Download

FY19 starts with a bang

(July 16, 2018)

We are surprised by the magnitude of the 100 bps increase in interest rates, and sudden weakening of the Rupee in mid-July.  Our earlier projections were more conservative as they were based on the worrying dynamics of Pakistan’s twin deficits.  While we expected the caretaker government to make necessary adjustments, the manner in which it was done, suggests possible prior understanding with the IMF and aspiring political parties.  The path that has been taken, also means the next government will not have much of a honeymoon period.  Despite the promise of a fresh government two weeks from now, the confusion about the country’s economic outlook remains.  Word Count: 1,296.

Download

3 of 6

1 2 3 4 5 6

We're located at:

122/1, 15th Street, Off Khayaban-e-Bukhari, Phase 6 DHA, Karachi

Call us:

+92 21 3584 5057