PakStox Outlook

A few days ago, someone asked me about the consistent rise of the stock market despite the obvious political, economic, and public finance issues, as well as the high interest rate and high exchange rate, which have led to demand destruction across the board. Additionally, we have a political system where it is easy to topple the center, but hard to maintain control afterward. The political gridlock ensures that things stand still and decay instead of creating an environment of political dialogue where the needed structural changes could be addressed. How is it that in an environment like this, foreign investors are pouring money into Pakistan and the market has risen to record highs while local investors are net sellers? My short answer is: money on one side and arguments on both. Leaving aside the fact that foreign investors haven't really poured in a significant amount, having made net purchases of just $150 million in the last year while still being net sellers of over $1.5 bil...

A high policy rate is not solely about getting inflation back to a certain level, and the solution does not lie solely with the central bank. The high level of inflation that we face, reflects issues with our public finances rather than external factors. International commodity prices have been declining for the past year, yet we have not seen a corresponding decrease in domestic inflation. Even if international oil prices fall to a level that provides relief from inflation and external obligations, it will not address the structural issues that have driven interest rates to their current level. In fact, during the 1990s, when oil prices were at record lows, we were still experiencing severe balance of payments issues.   Furthermore, our inflation isn't solely due to "supply chain constraints" – a buzzword for presentations and policy notes, alongside other terms such as "measured approach" and "V-shaped recovery." Limited by current economic jargon, t...

There's a certain hint of optimism that the Monetary Policy Committee might reduce the policy rate at its upcoming meeting on June 10th.  However, such hopes have been dashed before, as in April's meeting, when the State Bank of Pakistan kept the rate at a record high of 22% for the seventh consecutive time. It has been almost a year now since we reached this level, with rates first being raised in June last year. Several factors are rekindling hopes for a rate cut: a slight decline in the Karachi Interbank Offered Rate (KIBOR), T-bills rates, recent reductions in petrol prices, a slower pace of price increases, and a current account surplus. But it's crucial to recognize that a reduction based solely on a few positive indicators might be shortsighted. It could create the false impression that the real underlying causes of our high rates have been addressed. So far, I haven't observed any structural changes in the data flow indicating that the rates should come down.  C...