Game time!

The show began last week. The IMF press release could be deciphered in a few prior actions. One is the market based exchange rate, and that has been manifested in the last two days of week. The other two are on energy cost recovery, and promise of reducing fiscal primary deficit in budget. There is nothing explicit on monetary policy and probably IMF does not have a pre-condition of too high interest rates.
The other element is rollover of bilateral debt the government got from friendly countries, mainly accumulated in past nine months. The IMF board (read the USA) has an impression that the IMF loan might be used in paying back Chinese debt, and that condition is imposed perhaps to avert that fear. This also explains why the loan size is a mere $6 billion as against much higher external financing needs.
Another IMF requirement complied to is of SBP's independence and autonomy. The day after an unusual meeting with exchange companies, intelligence agencies and SBP on keeping exchange rate stable, the central bank let the currency float on its own. This episode at one end demonstrates PM's falling credibility on economic affairs and at the other depicts independence of central bank.
On a side note, the PM should not have conducted a high level meeting to control exchange companies. The job is usually done by director level SBP employees as and when required. In the previous regime, Dar once called these exchange companies and the next day, currency was appreciated and remained sticky. Such measures are not recommended here, but PM or FM should only come on front when it matters.
The paradox is that the market was aiming for stability under the MF programme, but after the much awaited news of IMF nod, conditional though, the stock market kept heading south. The economic perception that was ill managed by Asad has not apparently improved with the fresh team. One protocol has to be set - apart from the economic team, rest of PTI should simply not comment on economics. Even, PM has to be selective in his words.
The political opposition is hitting hard on new lows of currency and stock market. Maryam Nawaz's twitter cell is active again and now all the guns are pointed at Imran's economic mismanagement. Not to mention, that the PMLN government is responsible for the mess economy is facing today.
It is time to have credible communication with financial market participants. The finance minister and team, in quest of stabilizing markets and calming sentiments, met a selective brokerage community on Friday. The market got soft commitments including a much demanded bailout package of Rs20 billion. A similar fund was created in 2009, and the government institutions made good money on that inherit guaranteed fund. At that time, the investment was in less than 10 listed PSEs and the buying was at intervals to keep market stable.
Let's see how this fund functions. Stock market players are bullish and expect a rally once the dust settles i.e. once the IMF pre conditions are fulfilled. On currency, the market pulse is that, rupee may not depreciate more in short term as probably 150 level was committed to the IMF. But, if the PM could be wrong, no one is reliable, other than the SBP Governor.
At that the time of writing, selected brokers were meeting the Governor SBP requesting him not to depreciate the currency and not to increase interest rates further. Chances are thin that Governor will alter his thought process. Tomorrow is monetary policy announcement, and the market is expecting a 100-200 bps increase. Based on fundamentals, no change is warranted. The real interest rates are over 200 bps based on CPI and over 350 bps based on core inflation. The MPS announcement is every two months and if inflation creeps in, interest rates can increase subsequently. The IMF statement says that SBP focus should be on reducing inflation. One interpretation could be to increase interest rates to counter future inflation.
The MPS stance of IMF would be unveiled tomorrow. The gas price and electricity prices increase, new taxes and end of exemptions will all be penned by second week of June. The currency would be in equilibrium by then, if not now. If this writer to decide, he would not let it slip below 150 at this point, as REER is already in equilibrium.
We should not leave this on market forces, as market by definition is by having large number of buyers and sellers. That is not the case in Pakistan. The economic recovery has to come from fiscal side - two institutions ought to be reformed are energy and taxation. Without doing it, no level of interest rate or exchange rate management can bring stability. The disease cannot be cured by symptomatic relief, and too much of painkiller, can damage liver.