There was considerable disinflation in the headline CPI (national) in February – falling from 28.4% to 23.1% (up only 0.03% mom), the lowest outturn since June 2022. The deceleration was led majorly by lower food inflation and a high base effect. CA balance in January also came in at a moderate USD269mn, albeit down from a surplus of USD404mn in the previous month. Continued fiscal contraction and weak private sector credit offtake are other supporting factors for the MPC. Nonetheless, the SBP will remain cautious despite the above encouraging trends. Key risks to the inflation trajectory are (i) the near-term path of the exchange rate and (ii) tax measures that the IMF will demand for the next budget. The PKR-USD can come under pressure after nearly six months of stability. As per the SBP, Pakistan has to make debt repayments of US$5-6bn until June 2024 – which cannot be rolled over. We believe these include a US$1bn Eurobond due to mature on 15th April 2024, and the remaining payments will be paid to multilateral lenders (World Bank, ADB, IMF, etc.).

In the negotiations for a new program (after the SBA completes in March 2024), a delay in agreement on tough reforms could lead to increased speculation in the Fx market and demand for dollars. In our view, tough reforms could include taxing the retail industry (hitherto lightly taxed) and unifying the GST on petroleum and key agricultural inputs such as fertilizer and tractors. Both measures would be hard to implement for a new government, which commenced on 29 February 2024.

Survey of Top Banks: We asked the top banks in Pakistan for their expectation of the timing of the first-rate cut and policy rate by the end of 2024. Two-thirds of the banks surveyed expect the first rate cut by April or June MPC, while one-third expect it to be delayed until 2H2024. This was unsurprising as recent T-Bill auctions saw more than 50% participation in the 3mth paper (albeit their cut-off yields rose 90bps to 21.4%). Most banks foresee cumulative monetary easing of 400-500bps during 2024, taking the policy rate to 17-18% by the end of December 2024.

Courtesy – IMS Research