IMF’s (International Monetary Fund’s) SBA (Stand-By Arrangement) was a surprise for almost everyone, including some at the IMF itself. It is indeed a big relief for the nation. It has averted the threat of imminent credit default and has staved off the total macroeconomic collapse.
The question remains whether this is enough to restore investor confidence. The short answer is: no. I have spoken to a few top businessmen, and none is keen to investment till the uncertainty is over. The uncertainty is on the structural economic path going forward.
The currency market is depicting a similar sentiment. Some were expecting the currency to appreciate after receiving the surprise of $4.5 billion (almost doubling SBP’s reserves). However, the movement in the currency market was marginal last week. The general sentiment to have part of wealth (and preferably income) in dollars is very much intact.
The stock market has rejoiced after the IMF deal, and it may continue to rally; but the participants are not betting on future growth, rather capitalizing on cheap pricing that is attracting smart money. The market was operating at a Price to Earning (PE) ratio of 2-3 as compared to 15-16 in India and 20 in the US. Even if the market doubles, it would still be significantly lower than PSX’s historic PE.
The key is to have investment in the real economy. There is no visibility there. The manufacturers are losing competitiveness due to high interest rates and ever-increasing energy tariffs. The textile sector is not bullish at all.
“Fifty percent of textile industrialists had given up on Pakistan and industry already. After today, partly as a result of power rate hikes, another 25 percent (may) have decided to never set up industry again. People are generally losing hope,” bemoaned a spinner with a turnover of over Rs10 billion.
The policymakers and authorities need to introspect; they should work on a plan to restore investor confidence. Even at the time of Covid, the sentiments were not really bad. In the past 5-7 years, there have been some investments in the real sector.
State Bank of Pakistan’s TERF (temporary economic refinance facility), which is being criticized lately, is one example where production capacities in textile and other sectors have been added and modernized.
Apart from that, significant capacities in the cement sector have been injected. New automobile plants are being added. Smartphone manufacturing started in Pakistan. Now, no one is thinking to expand or venturing into a new business in Pakistan. People are thinking to diversify businesses out of Pakistan.
The general perception is that the IMF has helped Pakistan successfully avert default and the country has been given another opportunity to correct the course of economic path after a new government comes to power following the general elections.
It seems that there were political pressures on the IMF to keep Pakistan in a programme. The vibes coming from the IMF people are similar and some sections of press are echoing them. It was not easy to convince the IMF board on the SBA at such a short notice.
The IMF desires political stability and elections on schedule. It appears that the IMF deal is not at all an endorsement of the economic policies in Pakistan.
It seems that there is consensus on the IMF board that no one in Pakistan is taking the ownership of much needed reforms. The targets are being consistently missed, and the mistrust between the authorities and the Fund has only widened. Some board members were quite harsh and they even raised questions on the usage of IMF’s money against their interests.
The point is that Pakistan does not have any further room to sway from what have been agreed to the IMF. And if the current programme (which is largely frontloaded) is not followed, the country may find it difficult to get the next and bigger programme.
The point is that we are running out of room to manage the economy with its inherent structural imbalances- both political and economic. Neither the IMF nor the local business community is buying it.
The authorities may be able to attract foreign investment in agriculture and mining by giving firm assurances; but local business people’s confidence is far from being restored. And perhaps the only way for Pakistan to grow is to move away from state interventionist policies and have private sector-led growth. No signs of it, yet.
Copyright Business Recorder, 2023
Ali Khizar is the Director of Research at Business Recorder. His Twitter handle is @AliKhizar
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