Pakistan’s Prickly Purge Portents
Pakistani stocks closed 2013 with a 30 percent MSCI climb under an IMF program restart and scheduled Eurobond market return despite a range of economic and financial sector performance setbacks underscored in the Fund’s “mostly satisfactory” initial check. In particular the floor for net international reserves was breached as workers were expelled from Saudi Arabia and tensions mounted around former President Musharraf’s trial for alleged corruption and rights abuses. The central bank’s foreign asset position turned negative through September on over 5 percent rupee depreciation against the dollar with gross holdings at $4 billion covering just a month’s imports. GDP growth for this fiscal year will be under 3 percent on estimated 10 percent inflation and rough current account balance. Government borrowing for the budget deficit has led to a high 40 percent concentration of Treasury securities in bank portfolios which combined with bad loans may presage liquidity and profit squeezes, according to the December report. Public and external debt sustainability remains sensitive to shocks including criminal and sectarian violence and Afghanistan war spillover following the scheduled 2014 pullout of US troops. Revenue collection improved with income tax targeting and increased sales levies along with the settlement of state company obligations and electricity tariff adjustments. Audits are underway and exemptions have been eliminated in parallel with anti-money laundering efforts. Monetary policy will be tightened and the central bank is on track to limit foreign exchange derivative exposure as it attains independence in governance and operations. New insolvency, securities and deposit protection laws are planned, and official debt market deepening is a priority to diversify banks’ 75 percent share tilted toward 3-month bills. Diaspora, indexed, and Islamic instrument use will feature in attempts to lengthen maturities and construct a yield curve. Power supply has strengthened and payment arrears declined since the new administration took office in mid-2013, and privatization pioneered during the Sharif era two decades ago is again on the agenda. Energy and insurance companies will soon be divested through the stock exchange and dozens of “strategic” enterprises are to unveil restructuring details.
The Fund warns that it is owed an amount almost equal to “critically low” reserves with 2014 reimbursements set at $2.5 billion. Structural reform has just started and debt and equity offerings may encounter minimal foreign appetite, it concludes. South Asian neighbor India in contrast has experienced a share-buying revival in recent months, although the MSCI index was off 5 percent for the year and domestic investors are skittish heading into the election season. Food-driven inflation again hit double digits, but central bank chief Rajan maintained interest rates while promising tougher bad loan rules and inviting global distressed debt funds to aid in cleanup. Fixed-income inflows resumed in December as JP Morgan local benchmark index entry is in the frame, although perennial tax disputes with international telecom and technology firms threaten to quash spirits.
