Pakistan economy's three major markets under pressure: report

• Markets refusing to believe PTI government's economic narrative.
• Negative response from stock and money markets and exchange rate results in rapid downslide.
• As PTI govt became desperate borrowers, commercial banks started dictating it to pitch higher offered rates for T-bill investments.

ISLAMABAD: Three of the major markets of Pakistan's economy are under pressure owing to deteriorating macroeconomic fundamentals and aggravating sentiments, with the markets refusing to believe the government's economic narrative, a report published in The News Friday stated.

Alarmingly, the three markets, namely the stock market, money market and exchange rate, do not respond positively to the economic narrative being constructed by the economic managers, which results in a rapid downslide, the publication reported.

Prime Minister's Adviser on Finance and Revenue Shaukat Tarin and State Bank of Pakistan Governor Dr Reza Baqir had openly cautioned commercial banks against continuing to exploit the situation for offering Treasury Bills (T-Bills) at higher rates, or else stern action will be taken against them, top official sources confirmed to The News.

On ground, the situation remained unchanged as the government had become desperate borrowers, and commercial banks began dictating to the government to pitch higher offered rates for T-bill investments.

The bankers knew that under the IMF agreement, the government could not borrow from the State Bank of Pakistan (SBP), so they had assumed the driving seat and dictated the government to invest in T-bills at higher rates and only in three months maturity.

If the last auctions are analysed, the government raised Rs1,285 billion, out of which 62.64% was generated for three months maturity, 29.96% was raised for six months and only 7.39% was generated for a one-year period.

The government had raised a total of Rs1,285 billion against the target of Rs1,400 billion and against the maturity of Rs1,500 billion. The cut-off yields on three months, six months and one year remained unchanged at 10.79%, 11.50% and 11.51%, respectively. The Ministry of Finance raised Rs805 billion (almost 63%) through three-month treasury bills, Rs385 billion (almost 30%) for six months, and Rs95 billion (around 7%) from one-year bills.

The government became a desperate borrower mainly because of flawed debt management policy, said one top official and added that the government remained conservative to make borrowings in the last few months but now became desperate, so the bankers exploited the situation.

The official sources said that Pakistan’s stock market was not performing up to the mark as it seemed that foreign investors were pulling out by selling their stakes. There is a need to analyze fundamentals as well as sentiments to gauge the ground reality, the publication reported.

On the exchange rate, PM’s Adviser Shaukat Tarin had stated time and again that it would move two ways but it was not happening, so the one-way downslide of depreciation of rupee against the dollar continued unabated. There are several reasons for dollarization; the exporters stopped their proceeds abroad while importers rushed to open up their letter of credit, so the demand-supply gap further increased pressures on the exchange rate.

Dr Khaqan Najeeb, former adviser to the finance ministry, while talking to The News, said, “Astute policymakers must have an eye on the three key markets: PSX, money market, and the exchange rate market".

“The markets may not tell the whole economic story but they do reflect sentiment and some fundamentals,” he added. Dr Khaqan explained that the KSE 100 below 44,000 and continuous profit-taking despite market PE of 5, an exchange rate moving only in one direction and hitting a record all-time low of Rs177, and a higher T bill auction of three months at 10.78% and six months at 11.5%, disregarding SBP’s forward guidance are all to be taken seriously.

He emphasised, “The markets have to start trusting an economic narrative at present that doesn’t seem to be the case”.

In further conversation with this scribe, Dr Khaqan said that both the macroeconomic fundamentals and sentiments were aggravating the situation and some serious prescriptions were required to reverse this situation.

This scribe also contacted renowned economist Dr. Ashfaque Hassan Khan for comments. He said that the government had become a desperate borrower, so the bankers were dictating the situation. The bankers, he said, knew that the government could not borrow from the SBP under the IMF conditions, and in order to finance a huge budget deficit, the government was left with no other option but to heavily rely upon financing from the commercial banks. The space for maneuvering for policymakers has shrunk, so dictation of banks will continue in months ahead, he added.