KARACHI:
Pakistan’s central bank is expected to cut its benchmark interest rate – the cost of borrowing at commercial banks – by seven percentage points over the next calendar year to 15%, which will revive affordable finance for industries that rely heavily on in bank lending.
Such industries mainly include textiles, cement, steel and agriculture. In addition, commercial banks are projected to achieve a 12% rise in net profit in 2024 against the general assumption of a decline in profits after the interest rate cut and the imposition of a 40% tax on their windfall from alleged speculative rupee-dollar trades.
In a report titled “Commercial banks weather headwinds – Resilient near-term profitability expected”, Arif Habib Limited economist Sana Tawfik predicted a significant rate cut by the central bank. Speaking to The Express Tribune, he said the energy sectors, including oil and gas exploration companies and power companies, would also benefit from the rate cut one way or the other.
The research house forecast economic growth of 3.3% in the current fiscal year compared with government and central bank forecasts in the 2-3% range, arguing that higher growth will come from easing monetary policy, which will benefit industry, agriculture and farming. service sectors.
He said the central bank may make a token cut of 50-100 basis points in the policy rate at its monetary policy announcement in January 2024. The rate-cutting effort will certainly begin along with the massive easing of inflation from March 2024 onwards. Inflation, however, would remain elevated in November at around 28% due to the huge increase in natural gas prices effective from November 2023, Tawfik said.
The government will be the biggest beneficiary of the interest rate cut, which will reduce interest payments on accumulated debt. Lower interest costs will create some fiscal space for the government to undertake necessary development spending and support economic activities.
Reading: SBP keeps the key policy rate unchanged at 22%.
Besides, the current account deficit is expected to remain under control at around $4 billion. This, coupled with the stability of the rupee – due to the currency’s remarkable recovery in the first few months of 2014 and no significant devaluation as happened in previous years – will also support the booming economy. General elections scheduled for February 2024 and the expected signing of a larger IMF loan program will help attract foreign exchange inflows from global creditors and international investors. The interest rate cut and other supportive actions will boost Pakistan’s economic growth to 4.3 percent in the next fiscal year, i.e. 2024-25, Tawfik said.
With these developments, the Pakistan Stock Exchange (PSX) would grow by leaps and bounds as major financial institutions, including mutual funds and insurance companies, had started shifting investments to the stock market from fixed income instruments, he said.
The profitability of banks
In the report, Tawfik said “we expect short-term profitability for the banking sector to remain strong in the first half (January-June) of calendar year 2024, despite potential headwinds from the reversal of the interest rate cycle (cumulative 7% decline in political rate in LK24).
The lagged impact of asset revaluation against funding costs, potential balance sheet expansion and opportunities for capital gains in Pakistan’s portfolio of fixed investment bonds (PIBs) are potential mitigating factors against the potential NIM reduction from rate cuts.
The 40% tax on banks’ windfall income earned from rupee-dollar transactions in 2021 and 2022 will impact net profit only once in the fourth quarter (October-December) of CY23.
“Earnings will remain flat in the coming quarters with 12% growth in CY24 despite the likely increase in credit cost as a result of IFRS-9 implementation (effective from January 2024),” he said.
Published in The Express Tribune, November 26u2023.
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