Pakistan has achieved a breakthrough by signing a new 37 months EFF with the International Monetary Fund (IMF) amounting to USD 7bn (SDR 5.3bn). This significant achievement comes after the government’s stabilisation measures and the successful conclusion of the last Standby Arrangement (SBA) of USD 3bn back in Apr’24. The staff-level agreement reached between Pakistan and the IMF for the new EFF is now subject to approval by the IMF Executive Board.
Key Takeaways from IMF Press Release
The new EFF aims to support the macroeconomic stability achieved last year by strengthening public finances, reducing inflation, and building external buffers while removing economic distortion.
Fiscal Consolidation: Gradual fiscal consolidation by broadening the tax base and eliminating exemptions while increasing spending for social welfare
Tax to GDP: Authorities are keen to increase tax revenue by 1.5% of GDP in FY25 while 3% of GDP over the program
Primary surplus: Recently approved FY25 budget targets 1% of primary surplus (2% in headline terms)
Revenue: Revenue collection would be enhanced by simple and fairer direct and indirect taxation while targeting untaxed sectors, including retail, exports, and agriculture.
BISP FY25 budget would also provide additional resources for social protection and BISP spending.
National Fiscal Pact: The National Fiscal Pact aims to achieve a fair fiscal balance between the federal and provincial governments, including rebalancing spending activities in line with the 18th constitutional amendment. The Pact also gives provincial governments higher spending for education, health, social protection, and public infrastructure investment.
Provinces taxation: Provinces will increase their tax collection, including sales tax on services and agriculture income tax.
Agriculture tax: All provinces are committed to introducing agriculture income tax by Jan’25
Inflation and external: Reducing inflation, access to financing, and building strong external buffers are key for stability.
Monetary policy: Monetary policy will continue to focus on disinflation.
Exchange rate: SBP will maintain a flexible exchange rate and continue improving the functioning of the foreign exchange market.
Undercapitalized banks: To ensure fiscal stability, authorities plan to strengthen financial institutions, address undercapitalized banks, and upgrade their crisis management framework.
Energy: To restore the viability and sustainability of the energy sector, timely tariff adjustment, cost reduction reforms, and refraining from further unnecessary capacity additions should be followed.
Subsidies: Authorities should remain committed towards targeted subsidies / targeted BISP support and replace cross-subsidies.
SOEs: Improve state-owned enterprises (SOE) operations and management alongside the privatization of SOEs, with the highest priority given to the most profitable SOEs.
Pakistan Sovereign Wealth Fund: Increase transparency and governance around Pakistan Sovereign Wealth Fund.
Incentives/guaranteed returns: Phasing out incentives to special economic zones, agriculture support prices, refraining from new regularity or tax-based incentives, and any guaranteed return, including for projects routing through SIFC.
Anti corruption/trade policies: Authorities also committed to advance anti corruption, governance and transparency reforms and gradual liberalization of trade policy.
Outlook: The signing of the new EFF program has emerged as a significant and positive development, securing and supporting external sector outlook in the long term.
Currency: We anticipate the Pakistani Rupee (PKR) to remain stable in short-mid term driven by a positive sentiment arising from the new program.
Stock Market
§ The successful achievement of a staff-level agreement with the IMF will create a favorable environment for financial inflows from other multilateral institutions, bilateral partners, and friendly countries. These inflows are expected to contribute to an increase in the country’s foreign exchange (FX) reserves and help alleviate any external pressures. Additionally, the program will provide much-needed clarity and certainty regarding the economic roadmap alongside structural reforms for the next three years.
§ This will be beneficial for the markets as it offers a clear direction for economic policies and allows investors to make informed decisions based on the outlined framework.
§ Moreover, with respect to sectoral impacts, we believe that energy, being one of the top priorities of the IMF, would benefit the E&P, OGMCs, and Power sectors particularly.
§ We believe that the sectors with low utilization, including Cement, Autos, Steel, and Pharmaceuticals, would breathe a sigh of relief amid low economic growth. Thus, utilization and profitability levels of these sectors are expected to improve.
§ Our index target for Jun’25 is 109k, implying an upside potential of 36% from current levels.
§ KSE-100 is trading at a PER of 4.2x (2025) compared to the last five years’ average PE of 6.0x while offering a dividend yield of ~10%. Our preferred stocks are OGDC, PPL, MCB, UBL, MEBL, LUCK, FCCL, DGKC, MLCF, FFC, FFBL, PSO, HUBC, ILP, NML and INDU.
Courtesy – AHL Research
