Singapore May 19 2023: JP Morgran foresees 100bps of rate hikes in June, with limited room to ease for the rest of 2023 to embed a range of risk premiums as the State Bank of Pakistan (SBP) need to deliver more tightening to address persistent inflation pressures.
Pakistan Central Bank increase the interest rate by 1,125 basis points since Novemeber 2021 as SBP believes surge in inflation was broad-based, though a large part of it was contributed by food and energy components. This reflects the passthrough of increases in taxes and duties, unwinding of untargeted energy subsidies and the recent exchange rate depreciation.
Pakistan is facing a period of stagflation because of lingering supply-side shocks from last year’s floods, domestic policy tightening, and rising global recession risks.
“Assuming an alternative scenario where the IMF program is delayed indefinitely, Pakistan will likely have sufficient external liquidity to cover financing needs through June, but default risks rise significantly in FY24” the report states.
Medium to long-term outlook surrounding debt sustainability is increasingly challenging, given post-flood growth shocks, rising debt servicing costs, and tight onshore domestic liquidity.
JP Morgan expects that the IMF program remains intact, but the path to a benign outcome is increasingly narrow.
Pakistan’s near-term macroeconomic outlook has deteriorated significantly due to the floods last summer, one of the worst in the country’s history. Estimates of total economic cost have risen very sharply to US$30-40 billion (8-10% of GDP), reflecting extensive damages to agriculture, housing, and infrastructure. The cotton industry is bearing the brunt of the flood impact, with direct spill-overs into textile exports, which contribute over half of Pakistan’s exports. As of December 2022, or the first half of FY23, industrial production contracted 2.9% year on year, implying GDP growth of 2.0% year on year (FY22: 6.2%) based on historical correlations. We have recently revised lower our FY23 growth estimate from 1.3% to 0.1%, with more downside risk against the backdrop of a tighter domestic policy mix (e.g., fuel/electricity price hike, policy rate increase), lingering import controls (especially for non-essentials such as autos, metals), and elevated global recession risks.
