If last quarter was all about managing inflation, the current quarter will be about how to avoid a recession. The monumental speed at which Fed is hiking rates has left all Central Banks (CBs) without an option to match Fed in some shape and form. This is why more than 70% of CBs world wide have increased rates in the last quarter.

MPS Outlook

Pakistan last increased the policy rate on 7th July. Since Pakistan’s economic crises bloomed  much earlier than the rest of the world, it could afford the luxury of keeping rates unchanged in the last MPS, as it had already hiked 8% in 10 months. And though the entire market is expecting a no change in Monday’s MPS, a slow down in MoM inflation has left some analysts talking about a 50 bps cut.

Navigating with IMF
As with FX, the only problem in lowering interest rates, is navigating with the IMF. Kristalina Georgieva, the IMF’s managing director, said a succession of economic shocks had unleashed persistently high inflation, and threaten severe economic uncertainty, amidst frequent natural disasters. Her opinion infers that these are truly unprecedented times which need close collaboration. As discussed in the previous weekly, if a compelling narrative is built around the flood disaster, livelihoods and civil unrest, the IMF may adopt a more flexible stance. Especially after new found love between US & Pakistan.

Rupee Continues Gains
For FX, we continue to see Rupee strengthen to the 210/$ level. While the momentum could take USDPKR lower to 200, anything below 210 (refer to framework in last weekly) will start hurting exports substantially. In addition, free subsidy to importers (through cheaper dollars) will add to the economic woes. So while Rupee can be shepherded to the 200 level, economically, it may not be viable, especially in the back drop of 1. Regional currencies are making all time lows (e.g. INR touched 82.30/$, 2. OPEC supported oil prices by cutting back on production 3. REER, at 220/$, is around 105.

Rupee Centric Approach Perplexes Economists
While most Central Banks are intervening to support their currencies (and in a big way too), what worries economists is the fact that the incoming Finance Minister has said that his top priority is to strengthen the Rupee to at least the 200/$ level. Taking nothing away from a stable currency benefits, they wonder who will talk about the more critical issues of productivity, enabling environment, fiscal space and long term reforms. For this reason, they feel this is just for optics and short term political mileage.

Other Relevant Developments
– Reserves slipped by $173mn, which is expected as it coincides with the current CAD run rate
– Dollar Index consolidated to 112.75.
– Trade deficit $2.88bn (Sep). Exports fall 0.91%, Import fall 19%

– Moody’s cut Pakistan rating to CAA1


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