Silver lining in sight?

The political drama continues. Arguments and moral positions switch in matter of days for politicians and media persons depending upon their respective political leanings. In a sense, those who claim to be ‘fair and balanced’ are getting exposed. All of it is happening at a time when the country is witnessing profoundly severe economic stress.

Markets don’t have political leanings; instead, market players seek stability, and see uncertainty as poison. For example, market players used to admire Musharraf for his economic policies of deregulation and privatization, even though he was a military dictator who abrogated constitution not once but twice.

Many big businesses still see the Musharraf era as the most successful economic period in the past thirty years. Yet, even in a stock market full of Musharraf fans, the intra-day movement in the hours leading up to his resignation (on 18th August 2008) was inversely proportional to his refusal to resign. Markets rallied once the dictator’s resignation came in. In fact, one could argue that markets embraced Zardari over Musharraf, signifying how important stability is to market players.

Similarly, the VoNC (vote of no-confidence) of April 2022 will be remembered as the original sin responsible for the volatility reigning over the markets today. Given the precarious economic conditions, it was possibly ill-timed, in hindsight. Currency free fall could have been averted.

Yes, there would have been depreciation, as the developed world is increasing interest rates, but the levels would not be this crazy. The stock market index would not have been this low. The IMF would not be this stringent. Friends would not have been this cold. The rating outlook would not have been downgraded. The Euro bonds would not be trading at half the prices. And the list goes on.

That’s because without the threat of VoNC hanging over its head, the PTI (Pakistan Tehreek-e-Insaf) government would have been able to take courageous, even tough economic measures to stabilize the economy. Apparently, Pakistan’s political leadership — whether from PTI or PDM (Pakistan Democratic Movement) — can only take the right actions if their political future is guaranteed. If not, they are more than willing to rule with a gun to economy’s head. Even the much-ridiculed Boris Johnson did not announce a subsidy on fuel or electricity prices when faced with a VoNC.

Thus, till the political uncertainty continues, markets will remain jittery. That is one of the prime reasons why markets have not calmed even after the long-awaited IMF staff level agreement. Having said that, the immediate concerns of default on the balance of payment seem to have been eased. There is significant slowdown in imports. As per government sources, the imports stood at $3.1 billion in the first 20 days of July.

The initial hysteria of ‘Shehbaz speed’ is slowing down. The government is no more procuring expensive LNG at spot and other fuels to end load shedding. The pricing revision in petroleum prices has significantly dented demand of petroleum products. Earlier, dealers were hoarding diesel in anticipation of price increase. And seeing that, OMCs (Oil Marketing Companies) were importing at full throttle. Pakistan imported record volumes in April to June 2022. Now the inventories are piling, and imports have decelerated.

Then SBP (State Bank of Pakistan) has informally been rationing the import demand by being extremely selective in allowing LC issuance (letter of credit). This rationing was supposed to be done by the government. However, the government was busy in politics while the PM was obsessed with his so-called speed. The finance minister was not allowed to exercise his will. He faced backlash from opposition and his own party alike. Perhaps, what SBP did was his will too.

However, formal or informal ban on imports is against the will of the IMF (International Monetary Fund) as it leads to market distortions. Now the thinking of the economic managers is perhaps to slowly open the imports, as they have the comfort of falling imports and are expecting flows to come in. It is likely that mobile phones, cars (CKD) and other imports may partially open soon.

The current account in August (based on July imports trend) may come close to balance. The recent pressure of imports payment is due to high volumes of energy imports at peaking prices in the last two months or so. SBP did not intervene much to preserve its foreign exchange reserves. It is letting the PKR to be market determined.

That is going to subside by next month. The IMF board’s approval is likely. The markets are jittery on the funding gap of $4 billion to be plugged by friends. That is not a written pre-condition of the IMF in the MEFP. And the IMF is not seeking any written commitment on this $4 billion gap. There could be some verbal understanding.

Anyways, $4 billion (or even more) is important. The SBP reserves are enough to finance around 2/3rd of next year current account deficit or less than half of next year debt repayments. Overall coverage is one-fourth of financing gaps. Thus, it is imperative to secure financing.

The government is looking for buy-back agreement of shares of listed companies and selling of unlisted companies. Not much to raise from listed companies which are trading at too low a price. However, it’s fine to have a buy-back agreement. It’s not like selling at dirt cheap prices, as perceived by some journalists. Then the finance ministry is looking for private sector solutions of commodity financing for imports of food commodities. There are talks with Qatar on importing LNG at deferred payment.

Markets and countries are either not entertaining Pakistan at all to lend or offering too high rates. That is why the government is looking for buy-back agreements and deferred payments on imports. In that way, the rates could be manageable. Another idea is to pledge physical gold of $3.8 billion worth (as of May 2022) to get better rates and required liquidity.

Then the commodity prices are slightly coming down. That is a relief. But the country cannot rely on the hope of prices declining. The need is to create buffers to avert default. And for that panic in the market needs to be arrested. For that currency needs to be stabilized. And for that political temperature needs to calm down. As based on economic fundamentals alone, Pak Rupee should appreciate a bit this week.

Copyright Business Recorder, 2022