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OTG: Pakistan – Steady As She Goes

By Standard Chartered Bank

Summary

February marks Pakistan’s entry into the last six months of its three-year IMF Extended Fund Facility (EFF). Staff-level agreement on the 10th review was reached last month, with the programme likely to be concluded by August 2016. The Fund’s mission chief, Harald Finger, has described the prospects of a successful programme as “quite good”. We believe policy makers will continue to focus on meeting programme targets – particularly fiscal consolidation and building FX reserves – as they enter the last few reviews.

Despite tighter fiscal policy, we believe domestic demand requires little stimulus after 350bps of cuts since November 2014 (On the Ground, 9 November 2015, ‘Pakistan – Spotlight on domestic demand’). Credit flows to the private sector in 7M-FY16 were twice the level in FY15, and consumer confidence was at an all-time high. However, we maintain our FY16 GDP growth forecast of 4.4% on supply-side constraints (e.g., energy shortages and a lower cotton crop) and trade weakness, partly on real effective exchange rate (REER) strength.

Rising import demand and declining exports widened the non-oil goods trade deficit (FOB) by c.90% y/y in 7M-FY16. Despite low oil prices, the goods trade deficit was nearly flat (-1.3% y/y). Remittance growth slowed to 6% from 17%; we expect similar growth for the full financial year ending June on weaker GCC growth. We raise our current account (C/A) deficit forecast to 1.3% of GDP from 0.6%. Against this backdrop and stable inflation, we expect the central bank to keep the policy rate steady at 6% in FY16.

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