‘On the path to recovery’
Credit Suisse releases report on Pakistan’s economy
Statesman Report
KARACHI: Swiss financial services firm Credit Suisse in its latest report has concluded that Pakistan’s fundamentals have “improved significantly” but warned of “challenges” that lie ahead.
Titled “Pakistan: On the path to recovery”, the firm credited “assistance from the International Monetary Fund (IMF)”, “fiscal consolidation”, and “much needed reforms” for the improvement in country’s economic condition.
“Near term, we expect equities to remain range-bound after a strong rally, but the long-term upside potential remains significant,” the Zurich-based firm said.
The firm added that it was also expecting the State Bank of Pakistan (SBP) to slash interest rates in the range of 100 to 200 basis points in the second half of this year as the IMF-driven rupee stepped back to stability path.
The financial services firm said it seems too early for a rate cut and “we believe the SBP will most likely await firm signs of disinflation before doing so”.
“In addition, real rates remain low implying limited pressure for rates to be reduced in the near term,” it said.
“We believe Pakistan’s rate cuts are weighed toward H2 given that inflation has yet to peak and the SBP would likely wait for 2-3 months of disinflation before considering rate cuts. We believe the central bank is likely to cut rates by 100-150 bps.”
Credit Suisse also pinned hope on IMF-backed reforms saying that they were injecting a dose of stability into the battered rupee that resiliently recovered four percent following the loan program.
“We expect the PKR (rupee) to remain stable going forward, supported by Pakistan’s commitment to the EFF (extended fund facility) program,” it said in the report authored by the firm’s Head of Middle East Research Fahd Iqbal.
In July last year, Pakistan agreed to IMF’s six billion dollars extended fund facility program to overcome its balance of payments crisis. “A continuation and improvement in this trend could support a modest overshoot on the REER (real effective exchange rate),” Credit Suisse said with the reference to the positive progress of IMF’s assessment on its extended fund facility (EFF) in Pakistan.
“We note that a move in the REER back to 105 (in line with levels seen prior to 2014) would correspond to a further 2-4 per cent appreciation in the PKR, according to our estimates,” it added. Credit Suisse said the rupee had had become extremely overvalued, as measured by the REER prior to devaluations.