Pakistan climbing to the emerging-markets club: report


Pakistan’s economic reform programme is starting to bear fruit amid expectations the country will soon join the MSCI emerging markets (EMs) index.

Since 2013, the country has worked with the International Monetary Fund (IMF) to stabilize its economy, making “significant progress” in strengthening macroeconomic stability by reducing the budget deficit and rebuilding foreign-exchange reserves, a London-based magazine `Euromoney’ reported on Thursday.

“Fiscal consolidation has been at the heart of the programme. The authorities have made significant progress bringing the fiscal deficit (excluding grants) down from 8.5% of GDP in FY 2012/13 to 5.4% in FY 2014/15,” it states adding that they aim to reduce it further to 3.5% in 2016/2017, to shrink public debt.

Meanwhile, the current-account deficit is broadly stable – the IMF predicts it will remain at about 1% this year thanks to a reduced oil import bill.

It was more than $1.6 billion in the nine months from July 2015 to March 2016 – a year-on-year reduction of 18.5% – according to figures released in April from the State Bank of Pakistan.

The State Bank of Pakistan, under Ashraf Mahmood Wathra, has also established an independent monetary policy committee.

The rupee is free floating, but the central bank intervenes to keep volatility down. Otherwise, the currency would likely be even stronger, the report quoted economist Alan Cameron at boutique investment bank Exotix as saying.

“There are pretty good investment inflows, so there is upward pressure on the currency,” he said. “The central bank is leaning on that by buying dollars in the spot market. If the central bank stepped out, the currency would be appreciating right now.”

Pakistani authorities plan to further bolster Foreign-exchange reserves, including by continuing with the central bank’s spot purchases and taking advantage of the oil windfall, notes the IMF.

Further accumulation could also help arrest further appreciation of the real effective exchange rate, which has been affecting competitiveness, said the policy lender in its report.

The exchange rate has remained broadly stable since the end of December.

Brian Muggeridge Andersen, portfolio manager at Danish asset management company BankInvest, predicts a maximum 3% to 5% currency devaluation over the course of the year.

Future investment BankInvest’s frontier market fund has assets under management of approximately $170 million, of which almost 18% is invested in Pakistan.

“Our view on Pakistan’s economy and as a whole is that there is a lot more promise and potential that it is given credit for,” said Muggeridge Andersen

The country is currently undergoing a reform process that is allowing businesses to invest and develop much better than was the case five years ago. Many companies have a solid, clean balance sheet.”

The country is on the brink of being upgraded from a frontier market to an EM by indexer MSCI, which will announce its decision in June.

An upgrade, in addition to billion-dollar infrastructure investment from China, will attract greater interest from a wider range of investors, predict frontier experts.

The China-Pakistan Economic Corridor (CPEC) is an ambitious $46 billion project to upgrade Pakistani infrastructure, including highways, railways and pipelines, stretching across 3,000 kilometres.

Large-scale manufacturing related to the CPEC will nudge GDP growth to 4.5% for the full year 2015/16, predicts the IMF.

However, more needs to be done, such as removing institutional and structural bottlenecks, says Hasan Jafri, founder and managing director of Singapore-based investment and country assessment advisory firm HJ Advisory.

“Over the longer term, Pakistan needs to focus on improving education, collecting equitable revenue, and creating a safe and stable environment to attract the kinds of investment flows a country its size and demographic profile requires,” he said.