IN THIS POST:
– Cutback on Interest Rates Expected
– Rupee to Appreciate by 4%
– Opportunity for Foreign Investment
The latest report from Credit Suisse has revealed that Pakistan’s economy is on the road to recovery. As one of the leading names in financial services in Switzerland, Credit Suisse’s report is titled “Pakistan: On the path to recovery” and concludes that there has been a significant improvement in Pakistan’s economy, but many more challenges await the country ahead. Here’s an overview of what the report on Pakistan’s economy highlights.
The Key Findings of the Report on Pakistan’s Economy
Crediting the assistance from the International Monetary Fund (IMF), as well as the much-needed reforms, including fiscal consolidation to reduce the country’s fiscal deficit, Credit Suisse said that there has been an upward shift in Pakistan’s economic condition. While no sudden rises can be expected in the near future, the long-term potential remains in the positive. The “Pakistan: On the path to recovery” report was authored by Fahd Iqbal, who is the firm’s Head of Middle East Research and here are some of the most significant findings from Credit Suisse’s report on Pakistan:
Cutback on Interest Rates Expected
The Zurich-based firm stated that as per its findings, there is a high chance that the State Bank of Pakistan (SBP) would eventually cut down the interest rates by around 100 to 200 basis points (bps) in the second half of 2020, once the IMF-driven aid has stabilised the Pakistani Rupee (PKR). Currently, though, it is too early to cut down on the interest rate, and the SBP will probably wait for a drop in the rate of inflation before considering this measure, especially considering that the real interest rates also remain low, implying little need for the rates to be reduced in the near future.
To quote the report directly, “We believe Pakistan’s rate cuts are weighed toward H2 given that inflation has yet to peak and the SBP would likely wait for 2–3 months of disinflation before considering rate cuts. We believe the central bank is likely to cut rates by 100–150 bps.”
Rupee to Appreciate by 4%
Pakistan agreed to the IMF’s Extended Fund Facility (EFF) programme in July last year and was given six billion dollars to offset its balance of payments. Within the report, taking the IMF-backed reforms into consideration, Credit Suisse also hopes that the battered rupee will eventually witness stability that will allow for a 4% appreciation.
The report stated, “We expect the PKR (rupee) to remain stable going forward, supported by Pakistan’s commitment to the EFF (extended fund facility) program.”
Assessing the impact of IMF’s EFF in Pakistan, the report also concluded that it could result in a slight improvement in the Real Effective Exchange Rate (REER), which will improve the outlook of the Pakistani Rupee in comparison to other major currencies of the world.
“We note that a move in the REER back to 105 (in line with levels seen prior to 2014) would correspond to a further 2–4 per cent appreciation in the PKR, according to our estimates,” concluded the report in this regard.
Observing the historical trends, Credit Suisse noted that the rupee had become overvalued prior to its devaluations by REER. Still, efforts to eradicate the overvaluation have actually left the currency at its cheapest, with a nearly 33% drop witnessed between December 2017 and July 2019. Most of the devaluations occurred in small 5% to 6% drops that resulted from the government’s negotiations with several international donors to bridge its financial gap of around $12 billion. A further 15% drop occurred just before the funding was finalised with the IMF, probably driven down to comply with its prerequisites for funding.
Credit Suisse drew this analogy by comparing Pakistan’s measures of devaluation with those of Egypt, where similar policy measures had been taken to devalue the local currency to become eligible for IMF aid.
Now, recent appreciations have neutralised the value of the PKR, and the approval of the EFF programme has given a steady rise to the PKR. Credit Suisse notes that this appreciation points towards the currency’s value being under control once more, and it also reduces the risk of a drop going forward. A further 4% rise is predicted in the future.
Excellent Opportunity for Foreign Investment
Since the Pakistani Rupee has stabilised after a long period of devaluation and depreciation, foreign investors all over the world are starting to note the gradual incline, with foreign investment constantly picking up pace over the past six months. The financial services firm is of the opinion that carry trade can offer lucrative risk/reward opportunities, especially with regards to investment in short-term Treasury bills (T-bills).
However, with low liquidity, the biggest risk for investors is the possibility of another devaluation, the chances of which are fairly low, with Pakistan being at the early stages of the IMF EFF programme and the expected build-up of reserves in the future. The report concluded that all possible signs point to a revaluation of the PKR, thus making foreign investments quite rewarding.
Credit Suisse’s report on Pakistan’s economy also states that tourism and exports are two sectors that Pakistan genuinely needs to develop; the sooner, the better. It also acknowledges the government’s efforts to boost tourism, which has resulted in Pakistan being ranked as the best holiday destination for 2020 by Conde Nast Traveller. Overall, there’s an improvement in Pakistan’s economy, but much more needs to be done to raise the Pakistani Rupee to its earlier rates.
A steady influx of foreign investment in real estate has also been witnessed over the past few months with overseas Pakistanis eager to invest in areas like Bahria Town, Karachi, Capital Smart City, Rawalpindi, Eighteen, Islamabad, Gwadar Golf City, and more. On the whole, Pakistan’s economy is moving towards stabilisation, and we’ll keep you posted on the latest updates, so check the Zameen Blog regularly. You can also subscribe to our newsletter for a daily prompt on our latest posts.
