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JS Securities Limited – JS Research (January 24, 2023)

Karachi, January 24, 2023 (PPI-OT): MPS briefing – SBP pins hopes on inflows

The Monetary Policy Committee announced a further 100bp hike, taking Policy Rate to 17% (in line with JS research forecast), reasoned with concerns on higher inflationary environment, including core inflation and the need to anchor the same.

Post MPS briefing was broadly around FX reserve management, a pressing issue with import cover at 4 weeks. Despite most obligations rolled over for FY23, the country still has debt payments of US$3bn by Jun-2023, in addition to CAD of ~US$4.5bn. As per SBP, these are expected to be financed by likely inflows from friendly countries and financial institutions.

Going forward, while do see another hike of 100bp in next monetary policy but SBP will likely shape monetary policy in light of fiscal measures adopted by the government in the run up to the IMF program.

Policy Rate up 1% to 17% on higher inflation concerns

In-line with our forecast, the Monetary Policy Committee announced a further 100bp hike, taking Policy Rate to 17%. The benchmark interest rate has now reached a 25-year high, where last the interest rate (which was the Discount Rate earlier) were at these levels in the late 90s. The increase was reasoned with concerns on higher inflation, including core inflation and the need to anchor the same. The hike adds to recent developments that indicate the government and regulator (SBP) are making all efforts to revive the IMF program, which has not shown much progress on its 9th review pending since Nov-2022.

FX flows management

Progress on the IMF program is vital as it would unlock fresh FX inflows for Pakistan, which at present has an import cover of just 4 weeks. The same concern also echoed in the briefing post Monetary Policy announcement where the Governor of State Bank of Pakistan (SBP) briefed some key numbers on prospective FX outflows.

On hopes of inflows

With FY23 starting with FX financing needs at US$33bn (CAD: US$10bn, Debt obligations: US$23bn), bulk of it pertained to 7MFY23. A total of US$9bn of debt obligations have been met in 7MFY23 and US$6bn were rolled over, settling US$15bn out of the US$23bn scheduled payments. Out of the remaining US$8bn for the last five months, US$3bn would be rolled over, US$2.2bn are expected to be received back after payment and the residual US$3bn would be paid. Answering to questions pertaining to source of funding the US$3bn debt by Jun-2023, SBP responded it has hopes pinned on funds to be received from friendly countries and financial institutions in the near future.

Current account deficit to shrink

With restricted imports so far in 1HFY23, the CAD tally has come down by 60% YoY to US$3.7bn. SBP expects this would also decrease pace for FY23, taking CAD estimates down to US$9bn, vis-à-vis US$10bn estimated previously. Moreover, SBP also briefed on releasing imports piled at the port under the condition of payment arrangements from external sources or deferred payment of at least 180 days, in light of the thin FX reserves of the country. On the other hand, administrative controls and economic consolidation keeps SBP’s GDP growth expectations below 2% for FY23.