IMF deal boosts capital markets

KARACHI:

Pakistan’s capital markets are all set to celebrate an unexpected early win with the staff-level agreement on a $7 billion Extended Fund Facility (EFF) with the International Monetary Fund (IMF). This 37-month deal is expected to push the stock market past a recent record high of over 81,000 points on Monday, while the rupee is expected to stabilize at 278/$ in the short to mid-25-year term.

The Pakistan-IMF staff-level agreement, pending approval by the IMF Executive Board, is expected to unlock additional financing from other multilateral and bilateral creditors, including the World Bank and Saudi Arabia. This will also attract foreign investment (hot money) into local government securities (T-bills) and the stock market, boosting foreign exchange reserves.

Speaking to The Express Tribune, Tahir Abbas, Head of Research at Arif Habib Limited, said the outlook for the Pakistan Stock Exchange (PSX) remains upbeat, with an expected immediate rise of 1-1.5% (800-1,200 points) on Monday as reaction to the agreement. The benchmark KSE 100 is expected to breach its recent intraday all-time high of 81,087 points on Monday. It forecasts a full-year return of 38-40% for FY25, with the index rising to over 110,000 units by end-June 2025.

Abbas added that the Pakistan Rupee (PKR) is expected to remain stable at Rs 278/$ in the short to medium term (three to four months) due to the positive sentiment from the new program.

Tresmark, a treasuries firm, said in its weekly commentary that the rupee is poised for further consolidation with the early IMF staff-level agreement. Expectations of increased hot money, additional multilateral inflows and higher export earnings support these forecasts. Equity markets, already near record highs, are likely to get an additional boost. However, the rupee is not expected to make significant gains, remaining around the 278/$ level.

It is recalled that the rupee gained 10.85%, or slightly over Rs 30, in six-and-a-half months to Rs 277.03/$ at the end of March 2024, compared to a record low close of Rs 307.10/$ on the first week of September 2023. It then depreciated nominally to Rs 278-278.63/$ and remained stable around these levels till date. Earlier, currency markets expected the rupee to resume its depreciation from July 2024 due to a possible gradual increase in imports of goods and services and the repayment of foreign debt worth about $24 billion in the 25th year.

The staff-level agreement eased immediate devaluation pressure, extending support for the rupee’s stability phase until October-December 2024.

The agreement proposes that Pakistan will increase its tax-to-GDP ratio by 1.5 percentage points in FY25 and 3 percentage points over the 37-month duration of the EDF. In addition, the government is advised to avoid excess power generation capacity, adjust power prices, improve state-owned entities (SOEs), strengthen monetary and fiscal policies, increase social spending through the Benazir Income Support Program ( BISP) and enhance economic activities and growth.

The tough program, which includes imposing taxes on agriculture, real estate, wholesale and retail trade and continuously adjusting energy and gas prices to reduce subsidies and improve fiscal operations, may hinder the economy to reach its full potential. Pakistan’s economic growth is expected to remain subdued at 3-3.5% in 2025, with inflation expectations revised to 13-16% in the near term due to increases in milk and energy prices.

Abbas noted that imports of goods (raw materials) and services will remain low at $4.5-5 billion per month for several months as the government continues to control overseas markets due to low foreign exchange reserves ($9.40 billion dollars), which provide less than two months of import coverage. Economic activities are expected to gradually improve after a few months from the first IMF tranche and additional inflows from other multilateral and bilateral creditors.

Pakistan achieved a major breakthrough by signing a new 37-month EDF with the IMF of $7 billion (SDR 5.3 billion). This major achievement follows the stabilization measures taken by the government and the successful completion of the $3 billion Standby Arrangement (SBA) in April 2024. The new EFF aims to support the macroeconomic stability achieved last year by strengthening public finances, reducing inflation, creating external safety reserves. and the removal of economic distortions.

Regarding the sectoral impact on the Pakistan Stock Exchange (PSX), Abbas said that energy, a top priority for the IMF, will benefit oil and gas exploration (E&P) companies, oil marketing companies (OGMCs) and the oil and gas sector. energy. Low utilization sectors such as cement, automobiles, steel and pharmaceuticals are expected to see improved utilization levels and profitability amid subdued economic growth.