Tightening global conditions may pose risks to Pakistani economy, Standard Chartered strategist says

KARACHI: Standard Chartered Global Head of Research and Chief Strategist Eric Robertsen has warned Pakistan that, despite economic improvement, vulnerabilities may arise if global liquidity tightens.

“I think we have seen a really important trajectory in Pakistan’s economy. We have seen a rebuild of FX reserves. We have seen, I think, an improvement in the growth inflation trade-off,” Robertsen said at a media round table on Tuesday.

He said that Pakistan’s single-digit inflation is a positive development. Additionally, the country has received credit rating upgrades. However, he cautioned that much of this progress has been influenced by external factors. He observed that a significant portion of the improvements over the past couple of years is due to global excess liquidity, with international investors seeking higher returns and the global bond markets behaving more favourably. This situation has been advantageous for Pakistan.

“If the external environment were to become less friendly next year, say liquidity tightens, then we see whether or not some of the underlying vulnerabilities come back,” he added. “I think if Pakistan can achieve growth of 3.5-4 per cent, if inflation stays under control, if the central bank could continue to cut interest rates — we think the central bank is probably nearing the end of its rate-cutting cycle, but if that view is too conservative, and perhaps we are wrong, maybe they can continue to cut more aggressively — that will bring more capital back,” Robertsen said.

Pakistan’s headline inflation has sharply declined over the past two years, reaching 6.2 per cent in October. The country’s central bank reserves have increased nearly fivefold from a low of $3 billion in 2023. The State Bank of Pakistan has lowered interest rates by 1,100 basis points since June 2024. It has held them steady at 11 per cent during its last four meetings, with the most recent cut occurring in May. Pakistan’s economy has stabilised following a $7 billion loan programme from the International Monetary Fund. The South Asian nation expects the global lender’s executive board to approve a $1.2 billion loan tranche in early December, following a staff-level agreement reached last month.

The bank’s strategist said that there has been an unprecedented increase in liquidity in global markets, with central banks around the world delivering over 300 interest rate cuts in the past two years. As a result, asset performance has been exceptionally strong across various classes, including equities, fixed income, credit, currencies, commodities and bitcoin. Everything is experiencing a rally, except for oil, which has not rallied.

He emphasised that the strength of the dollar remains dominant and dismissed the notion of de-dollarisation. Although he conceded that there has been some diversification away from the dollar, he maintained that it would be inaccurate to describe it as abandonment. In reality, global central bank portfolios have grown. Consequently, although the dollar’s share has decreased in percentage terms, the absolute amount of dollars held by these banks has actually increased

According to Robertsen, Standard Chartered predicts that the global economy will grow by about 3.0 per cent this year and expects a similar growth rate for next year, potentially exceeding 3.0 per cent slightly. China’s economic outlook is crucial, especially in terms of its GDP contribution to global growth, he said. As long as China’s GDP growth rate does not fall below 4.5 per cent, global growth should remain around 3.0 per cent or possibly a bit higher.

Rehan Shaikh, chief executive officer of Standard Chartered Bank (Pakistan), addressed the session by discussing the country’s economy. He highlighted that the recent endorsement from the IMF in the latest staff-level agreement serves as clear evidence that progress is being made, although more action is necessary. He noted that remittances are performing well, with the central bank governor projecting that the figure could reach as high as $40 billion for the upcoming fiscal year. However, he emphasised the need to significantly improve exports. Shaikh stated that investors are focused on stability, returns, and the ability to repatriate their investments.

In response to a question, he mentioned that the IMF has limited resources and cannot support everyone.“It should be a Pakistan programme rather than an IMF programme. The IMF can just come and tell you that you need to reduce your expenses, generate more income and expand on what you are doing,” he said.

The bank’s CEO highlighted that relying on this support only leads to boom-and-bust cycles every five to seven years, which is not sustainable. He expressed hope that Pakistan’s renewed fiscal discipline and the government’s reform agenda will gradually establish much stronger economic fundamentals on a sustainable basis.“The market is opening up. We are seeing more and more Middle Eastern banks. We are seeing more ADB, IFC, and World Bank. They are all coming back,” he said.