Karachi, July 13, 2023 (PPI-OT): Pakistan Strategy - Rejoice, for the IMF is finally here!
Rejoice, for the IMF is finally here! While Pakistan’s staff level agreement (SLA) for the SBA caught everyone off-guard, Board approval for the same had widely been expected.
Overall, the SBA has been approved by the lender’s executive board for US$3bn (SDR2,250mn), with US$1.2bn (SDR894mn) set to be disbursed immediately.
After securing endorsement from the IMF, the country will be able to mobilize further funding from bi-lateral, multi-lateral and other sources which will help shore up FX reserves.
The IMF’s targets portend a challenging year ahead, particularly with respect to primary account. We believe GoP may find it hard to depict a surplus of 0.4%, while IMF’s average inflation at 26% is significantly above our expectation of avg. 21.4%.
On the market side, with FX reserves firming up, consequent improvements in the PkR/US$ parity, GoP having announced elections and a still sub 3x market P/E to result in a cautiously optimistic view going ahead.
Pakistan enters into IMF SBA: Rejoice for the IMF is finally here! While Pakistan’s staff level agreement (SLA) for the SBA caught everyone off-guard, Board approval for the same had widely been expected. This came after Pakistan entered an IMF SBA for a period of 9 months during end of June’23. The SBA is consequently replacing the outgoing EFF program, which the country failed to complete with 9th and 10th reviews left pending. Overall, the SBA has been approved by the lender’s executive board for US$3bn (SDR2,250mn), with US$1.2bn (SDR894mn) set to be disbursed immediately. This is the 13th SBA Pakistan has entered in its history while the 3rd since the year 2000. Treading the same lines as the SLA, the board approval for the SBA focuses on i) implementation of Budget’24, ii) a return to market determined exchange rate, iii) appro- priate monetary policy implementation aimed at disinflation and iv) progress on structural re- forms, particularly on SOE governance, energy sector viability and climate resilience.
Post the approval, immediate disbursement of SDR894mn (US$1.2bn) will take place, with the remaining amount of US$1.8bn will be disbursed in two tranches, subject to quarterly reviews. It is to be noted that although the SBA is larger than the now defunct EFF program (pending payments), it is important to remember that the SBA is a temporary solution and it merely provides Pakistan with time to implement necessary reforms before it will be required to enter another IMF pro- gram. Therefore, it is crucial to maintain strict control over expenditures (despite it being an election year) and diligently pursue reforms in areas such as tax collection and energy. Failure to do so may result in finding ourselves in the same position nine months later as we were in June’23.
IMF’s approval may unlock further inflows: After securing endorsement from the IMF, the country will be able to mobilize further funding from bi-lateral, multi-lateral and other sources which will help shore up FX reserves, with the incumbent Finance Minister hinting at country’s FX reserve reaching US$1415bn by end FY24. Recall over the past few days, Pakistan has already received US$2bn from Saudi Arabia and US$1bn from UAE, thereby boosting SBP reserves to over US$7bn (to be reflected in June 21st data). Overall, the currency which has continued to remain volatile throughout the outgoing fiscal year (?35%), may find some footing in the near term, with the PkR/USD already returning 4% since FYTD. Overall, latest IMF tranche will likely instill confidence in the market and we may see PkR gaining grounds on US$ in the short term.
Investment Perspective: The IMF’s targets portend a challenging year ahead, particularly with respect to primary account. We believe GoP may find it hard to depict a surplus of 0.4%, while IMF’s average inflation at 26% is significantly above our expectation of avg. 21.4%, although it is a possibility that it may reach the lender’s projected levels, possibly due to the recent discussions regarding revisions in electricity base tariffs and consumer gas prices. On the market side, with FX reserves firming up, consequent improvements in the PkR/US$ parity, GoP having announced elections and a still sub 3x market P/E to result in a cautiously optimistic view going ahead. That being said, as stated earlier, the SBA has only kicked the can nine months down the road where for a sustained rally, reforms on the economic front (particular focus on Taxation, Energy and SOE side) need to be carried out. Furthermore, upcoming results may serve as a pit stop to bullish momentum particularly due to the substantial tax expectations amid potential retrospective applicability of the super tax.