Finally, a light at the end of tunnel

It has not even been a week since Mian Mohammad Shehbaz Sharif took over the office Prime Minister of Pakistan, and the general public that trusts his abilities is already expecting some positive economic developments, especially the rupee to trade around Rs160/dollar.

A more realistic anticipation by money market experts is the rupee to be around Rs172/dollar. This is assessed in view of increased selling volumes in forward contracts. Even the sentiment of people can be gauged by looking at week-on-week improvement in stock market performance.

Many argue that a massive recovery in stock and money markets seems to be contrary to the ground economic realities and one of them is that the country’s monthly current account deficit (CAD) has widened to the most dangerous levels.

Apparently Pakistan has not been able to finance its high deficit despite previous government's inflated claims.

Even with IMF funding, it will be a tall task not only because of the quantum of deficit but also because of the huge rise in Pakistan Credit Default Swap (CDS), which has more than doubled since March 2022, and will be a key obstacle in issuance of new Eurobonds.

In the last few months, the CAD was being funded by Foreign Currency Reserves (FCRs), but now even the FCRs are at critically low levels.

Total reserves have gone down by $10 billion from $27 billion to $17 billion in the last eight months of this financial year despite high volumes of foreign remittances and Roshan Digital Accounts (RDA) inflows until March 2022.

Our Iron brother China’s is yet to roll over its deposit of $2.4 billion even after two weeks of our repayment, their assurances, and them knowing our FCR situation very well. This s also a cause of major concern. China is likely trying to twist the arms of the new regime, but it is hoped that Pakistan will be able to renegotiate things during Prime Minister’s visit to China.

REER for rupee is around 98 (February 22) and should not fall out of line by having a material divergence between prevailing & REER value of rupee.

Thus, it is highly unlikely the rupee will sustain a rally below 180/dollar.

All eyes, including IMF’s, are on the new government to see whether it extends Governor SBP Reza Baqir's term or ends it when it reaches its expiration.

His extension as the central bank governor boost the market confidence, whereas his replacement will be seen as negative by the IMF and public.

Considering 2.5 percent sharp hike in interest rates by SBP, the bonds in the secondary markets have consolidated. However, analysts also forecast further hike in rates as many Central Banks of the world have also increased policy rates fast.

The Pakistani economy arguably needs higher interest rates for slowing down GDP growth and curtailing imports and business activities.

Like many countries around the world, Pakistan is also struggling with high inflation – the last consumer price report from February showed prices were growing at their fastest rate in years and the rupee was in a free fall due to current account deficit and higher import bills, especially of luxury goods.

It is a fact that export has not picked up and the current increase in rupee value of export is only due to the effect of devaluation of local currency. Increased energy costs shall also continue to adversely hit the economy.

Money market Investors are anticipating the Federal Reserve to further raise interest rates by another 50 basis points in its next meeting because of persistently high consumer prices.

And consequent to the same, the Pakistani currency will further weaken against the dollar. Prime Minister Shehbaz Sharif is cognisant of hopes pinned on him

by masses and he has already started deliberations for assessment of available options to take concrete actions including visits to friendly countries including Saudi Arabia, China, UAE, and also

some other countries that consider Pakistan as their partner. He would move heaven and earth to win their support by convincing them that Pakistan’s economy was in better hands now and on track to revive.

Undeniably, the Prime Minister is a driving force behind good governance, evident from his services in Punjab as chief minister, and chances are strong that he may surprise his critics into silence.

It is expected his upcoming foreign visits will help shore up the economy in a way that benefits the inflation-broken masses the most.

The writer is a former chief regulatory/compliance officer of Pakistan Stock Exchange