Markets across Asia rallied on Tuesday as Tokyo, Hong Kong, Shanghai, Sydney, Singapore, Wellington, Taipei, Manila and Jakarta all rose after yet another record on Wall Street as President Biden’s $1.2 trillion infrastructure bill fueled optimism that the recovery outlook might trump medium-to long-term inflation fears.
But Karachi tanked. The KSE-100 index dropped 715 points (1.52 percent) because while other markets and market players were able to capitalise on the euphoria triggered in Washington and New York, it was paralysed by uncertainty - the one thing markets hate even more than bad news.
The rupee too, which finally turned on Oct 27 on sentiment generated by the Saudi loan, couldn’t wait for the IMF (International Monetary Fund) announcement any longer and ran out of breath and fell 0.7 percent on Nov 9, breaching the 170 barrier once again to close at 171.45. Mr Market clearly took Prince Mohammed bin Salman’s interest-laden gift as a big win and counted on the additional fiscal space it would provide to tilt painstaking negotiations with the Fund in the government’s favour. It helped a great deal, of course, when just last week Finance Advisor Shaukat Tarin said the talks had indeed concluded and an announcement would be made in a day or two.
But then nothing happened. Then it turned out that the government hadn’t done enough homework for conclusive talks to even take place, which said something about the claim that things had been settled. And then it turned out that a big roadblock was the State Bank of Pakistan Amendment Bill 2021, which was approved by the federal cabinet in March 2021, because the government wants some of the amendments amended again and some of the clauses were “unconstitutional”. Then it also turned out, as quoted in a leading local daily and not exactly contradicted by the government, that the cabinet approved the amendment Bill without so much as reading it.
But if the Saudi breather was a game-changer because it was going to do the trick with the Fund and get us $1 billion of the remaining loan to soothe the market, and the Fund continues to have serious problems, then where’s the market supposed to put its money? There’s also the nagging question of just why the Saudis haven’t transferred any of the money yet, even though Shaukat Tarin said that the Saudi finance minister told him that all formalities were complete. But then Shaukat also claimed that he would not worry people with gas and electricity tariffs and get the IMF to dilute its demands when he took over as finance minister and stood Hafeez Sheikh’s policy on its head. That didn’t happen. He laced the budget with subsidies and said this fiscal would be the year of expansion. That’s going to have to change. He kept assuring everybody that talks were headed in the right direction when he was in Washington recently. But they weren’t. And now he’s saying all is well and the economy is in great shape when you don’t have to be a finance minister to know that it’s not.
All this has left the market completely, utterly confused. Quite often that can be worse than pushing it off a cliff. Even a 9/11 level Black Swan event, which shuts the market down completely yet one which it can still factor in, cannot take the life out of it like the threat that something very bad might happen very soon. And there’s no worse way than approaching such situations than sleepwalking into them; which is exactly what false assurances could do to a market like ours.
Things could suddenly look up again for a while if traders wake up to headlines that the Extended Fund Facility (EFF) has been revived. That will give the rupee a shot in the arm, even if it will also add to the debt part of the national reserves. But if front pages speak of claims and assurances that things are just fine, and then they don’t turn out to be fine, then the market will throw a tantrum. That wouldn’t just be bad news for investors, it would also rattle Islamabad because there’s nothing like the collapsing rupee, and the things that can do to things like the current account deficit and imported inflation, to give the government the kiss of death at the next election.
To think all this, undesirable as it is, wouldn’t have been quite this traumatic if only what was really happening was communicated more effectively to people who are most affected by it. In trying to make people feel better by forcing smiles on their faces, our finance minister has ended up causing a lot of uncertainty in the market. As a man of finance himself surely he knows that when you get traders all dressed up with nowhere to go, the market pays for it.
Copyright Business Recorder, 2021
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