Circular Debt, Policy Approach and a Positive Macroeconomic Outlook

TEXT: Experts weigh in at the 20th Annual Excellence Awards by CFA Society Pakistan

The Annual Excellence Award Ceremony is the flagship event of CFA Society Pakistan which is organized yearly to acknowledge and celebrate professional excellence and innovation in the financial markets. The key objective is to evaluate contributions made by various individuals and organizations in different award categories including Asset Management, Banking, Brokerage, Corporate Finance, Investor Relations, ESG Reporting and Recognizing Gender Diversity in the Workplace. The honorable Minister for Energy, Power and Petroleum, Mr. Muhammad Ali, graced the 20th Annual Excellence awards as the Chief Guest, and Deputy Governor State Bank of Pakistan, Dr. Inayat Hussain, CFA was the Guest of Honour.

In his address, Mr. Mohammad Ali initially praised the role of CFA® Charterholders and the CFA society in the development of Pakistan's capital market. He said that the country has significant investment potential in agriculture, energy, mining, IT, and exports. There is now a shift in the mindset of policymakers, with all stakeholders working together towards a common goal.

Mr. Ali mentioned two areas of concern: circular debt in the power sector and the gas sector. In recent years, circular debt in the gas sector has increased drastically, which the government is trying to curtail by revising gas prices for different categories. For the power sector, as of now, the accumulation of circular debt is zero, but there is roughly half a trillion due to shortfall in recovery. Therefore, the government is aiming to take control of the management of distribution companies (DISCOs). Currently, circular debt stock in the power sector stands at PKR 2.3 trillion, and in the gas sector, the principal amount is PKR 2.1 trillion. The government has set a deadline for presenting a roadmap for circular debt reduction by the end of October 2023, including medium-term and long-term targets. The government is actively working on both pricing and policies for the entire energy chain and is aggressively auctioning blocks. The petroleum sector in Pakistan is currently underinvested.

The minister further highlighted that there is a disconnect between policy makers and those who are responsible for decision-making. He envisions the need to combine efforts with all the think tanks and decision makers to make unbiased and corrective decisions that will lead to resolving all pending problems.

Regarding privatization, Mr. Ali stated that the privatization of Pakistan International Airlines and Pakistan Steel Mills is a top priority.

Dr. Inayat Hussain, CFA also discussed circular debt in the energy sector, emphasizing that it is a significant drag on our economy. He stated that its quick resolution is the need of the hour. The key highlights of his speech include: i) Pakistan is experiencing a stabilization phase, with the policy mix geared towards addressing macroeconomic imbalances. Furthermore, administrative measures have been taken to control imports, and a reasonable degree of the objectives that have been set have been achieved; ii) Inflation is on a downward trajectory, and both the current account balance and FX buffer have improved and iii) the outlook for all macro indicators appears positive for inflation, the external account, and economic growth.

Dr. Inayat highlighted that inflation will continue to fall, as the policy rate is in the positive territory, so there is no need to increase the policy rate for now. Due to tighter monetary policy stance and a number of administrative actions, current account has remained in surplus for four consecutive months. However, after July, the Current Account Balance started to moderate due unlocking of pent-up demand and retiring of LCs by the central bank. Current Account Balance for September is expected to be better due to improved trade deficit and rising remittances, while the fiscal deficit for the fiscal year is also expected to remain in a reasonable range due to a reduction in other commodity prices.

On the reserves front, two months ago, our reserves dropped to US$2.8 billion, and now they stand at US$7.6 billion. Similarly, SBP's forward book (short position) has also improved to US$4.6 billion compared to US$5.8 billion in February 2023. Fiscal deficit is expected to remain contained and macroeconomic imbalances would continue to moderate during FY24, mainly due to the synchronization of both monetary and fiscal policies.

The country's external debt has reduced to US$94.9 billion (FY23) from US$100 billion (FY23). This reduction is attributable to the retirement of US$3.9 billion in commercial loans, US$1.3 billion of Paris Club debt, and US$1 billion of international sukuk payments. Importantly, almost 44% of the country's total loans are from multilateral institutions.

SBP is eyeing a GDP growth rate of 2-3% in FY24, with agriculture output expected to remain a key contributor to this growth, including increases in cotton, wheat, and rice output. The health of the banking sector remains strong, with 94-95% being fully provided, and all banks are well capitalized and profitable.

While addressing the audience virtually, Mr. Paul Moody, Managing Director, Global Partnerships & Client Solutions, CFA Institute recognized CFA Society Pakistan’s tireless efforts alongside CFA Institute to promote highest standards of ethics and professional excellence in the investment community, for the ultimate benefit of society. He also applauded the Society and Board of Directors in the impact they make in the local investment industry and beyond, and appreciated the volunteers and their efforts to make the award ceremony successful.

Mr. Sajjad Anwar, CFA, President, CFA Society Pakistan, further highlighted that the Society is a volunteer driven nonprofit organization formed for the sole objective of development of capital markets. He highlighted that a journey that started two decades ago, with a mission to recognize and laud the outstanding achievements of the financial industry, has today transformed into a grand tradition that the industry eagerly anticipates. The Society has come a long way since its first award ceremony in 2003, expanding to 7 different categories. These awards embody and reflect the core mission of CFA Society Pakistan, which stands to promote the highest standards of ethics and professional excellence in the financial industry of Pakistan, for the ultimate benefit of society. Society members, who are CFA Charterholders, also follow this mission and have demonstrated their commitment to continuous learning and improvement, serving as beacons of knowledge and expertise in the field of finance.

In conclusion he hoped that this ceremony not only served as a celebration of the outstanding achievements in the industry but also as a catalyst to inspire us to continuously strive for excellence, uphold the highest standards of ethics, and contribute constructively to the prosperity of our nation.

Copyright Business Recorder, 2023