Karachi, August 01, 2022 (PPI-OT): Economic challenges continue for Pakistan

National CPI was recorded at 24.9% in Jul’22, driven by higher international oil prices and weakness in the currency. To recall, CPI rose by 21.3%YoY in Jun’22, taking FY22 average inflation to 12.15%, well above SBP’s forecast of 9% – 11%. Average inflation for FY23 is forecasted at 21.4%, compared to SBP’s forecast of 18%-20%.

Policy rates have been increased to 15%, with a recent hike of 125bps announced in the last MPC. The continuance of inflationary pressures warrant further policy rate hikes. We expect policy rate to settle between 16% – 16.5%, with negative real interest rates continuing through FY23.

The country’s liquidity issues and the resulting default fears have led to higher international bond yields, with the yield on the international sukuk with Dec’22 maturity increasing to 48.31%. The situation has been further exacerbated by the recent downgrade of Pakistan by Fitch.

Majority of the participation in the Jul 27 T-Bill auction was concentrated in the lower-term 3M Tenor, with 94% of bid amount accepted in the tenor, signaling bond market players expecting further interest rate hikes.

Investors are recommended to invest in short-term bonds, which offer higher liquidity and attractive rates, given the interest rate outlook.