Karachi, October 03, 2022 (PPI-OT): Sept-2022: A new FM, a new strategy
Re-entry of Dar as Finance Minister signals political clarity
KSE100 witnessed downward trend amid economic and political concerns compounded by ongoing impact assessment of floods, wiping out gains of almost 4% in first three weeks of the month. Ishaq Dar, a senior and close aide of former PM Nawaz Sharif taking charge of Finance Ministry in last week of September, however, managed to recoil some sentiments as it was taken as a symbol of short-term political clarity. Index closed the month down 3%, taking 3Q22 returns to -1%. This accumulated 9MCY22 losses to ~8%. Decline in index was accompanied by lower participation, with volumes down 40% MoM.
Similar to change in KSE100 Index, change of Finance Minister also impacted sentiments in forex market and limited PKR depreciation. For perspective, PKR depreciation for the month had reached to 8% till the third week, which limited to 4% by the end of the month. Hence, KSE100 US$ returns were reported at -7%.
Control on CPI among key targets
Post IMF’s initial press release regarding approval of Pakistan’s 7th and 8th reviews of the ongoing Extended Fund Facility (EFF), the Fund released its detailed Staff Report early this month. We understand final talks between IMF and Pakistan took place pre-floods, hence absence of remarks on floods or its risks (barring climate change risk) made IMF’s FY23 macro targets not as pertinent. IMF, though, indicated to reach out to agreed contingencies at earliest signs of fiscal program underperformance, including tax exemption withdrawal currently benefiting exporters. Fund has advised to take PDL on MS and HSD up to Rs50/ltr.
Contrary to Fund’s advice, govt further declining PDL on MS by Rs5/litre, to Rs32/litre, w.e.f. Oct-2022, makes the new FMs strategy clear – prioritizing control on CPI. To recall, CPI for Aug-2022 clocked in at 27% YoY, marking another multi-decade high. This momentum is likely to continue over food security issues in aftermath of floods, where Sep-2022 CPI has been reported at 23% YoY.
Declining oil prices – a silver lining in ongoing headwinds
Though CAD has begun to narrow, where Aug-2022 exports + remittances (receipts) to imports (payments) reduced to US$200mn deficit, from US$544mn in July-22, contraction has been possible over temporary administrative controls on imports. Near-term pressure on economy, also visible in the ongoing wide inverted yield curve, will be a key challenge for the new Finance Minister. Impacts of consolidation measures, energy shortages in certain segments and scarcity of imported raw materials are likely to be coupled with bearings from flash floods, significantly reducing FY23E GDP growth. Early signs of slippages have begun to emerge. Large-scale manufacturing (LSM) posted a negative growth of 1% YoY in Jul-2022, crossing over to red zone for the first time in almost two years.
Having said that, ongoing declining trend in global oil prices bodes well for Pakistan. Ex-Refinery prices of MS have declined 20% from high made in Jul-22. Lower oil prices are likely to result in lower than estimated value imports (Oil: ~30% of total imports) and CPI in coming months, providing support to forex reserves amid current import cover of (less than) 6 weeks. Lower than estimated CPI may converge negative real interest rates at a faster pace, giving some room to the government to meet IMF targets regarding PDL and other taxes.