IMF is the next finance minister

There’s a reason the financial market is called Mr Market. It, more often than not, reads the pulse of the political economy. And, going by Mr Market’s reading of the tea leaves, there could be some trauma yet in store for the economy before Naya Pakistan can be properly celebrated.

Let’s start with the discount rate, which just took a higher than expected jump, by 150 basis points, to 10pc. Now this is going to squeeze the cement sector in particular because it is leveraged to the hilt. Going forward, it will have trouble raising finances, and what little it does get will be at a very high cost.

Plus the dam initiative is not likely to take off within what is left of the fiscal year. That means that construction as a whole is likely to remain subdued. Recent news of Rs20 hike per bag prompted some day gains, but these are small joys. Sooner rather than later such news gives way to market reality, which is when bears claw their way back into the index. Punters make some small profits, but it hardly registers on Mr Market’s radar.

Now look at the other side. The rate hike should prompt foreign investors to save in our currency, at least in theory. That is so because the high rate will drive down bond prices, increasing yields. But, as always, there’s a catch. The volatility in the rupee erodes any gains there. That is why foreign investment hasn’t been flowing in quite like PTI expected before the election. And expectations of 150 to the dollar are likely to come true as early as January. How will the government sell that to investors?

There’s more. The five-hundred-something rise in the stock market on Friday was caused by one piece of news – the second of Saudi’s promised three billion dollars had arrived in state bank vaults. But wasn’t that much already factored into the market? Once again, you get a spike in day trading but will this give sustained buoyancy when the overall mood is so bearish? Also, the good news of the day was overshadowed by the bad news in the afternoon, which was not so factored in.

It turns out that some rating agency has downgraded the Pakistani rupee’s long term rating (surprise, surprise?). That makes our currency the weakest in south Asia. That means that it did not just miss the relief regional currencies like Indian rupee and Indonesian rupiah got from the fallout of the Fed’s (US central bank) suddenly dovish intensions on the recent emerging market rout. Rather, contrary to the trend, it fell through the floor. Again, the rest of the fiscal is without any real triggers that can translate into economic development.

State bank reserves, presently, stand at around $8b. If you count what the commercial banks hold then it can be stretched to around 13b, but they just don’t count unfortunately. And this is after the first Saudi one billion. Add the other if you like, but we can’t spend either. And people with understanding of the present economic situation, like the finance minister, understand that the economy urgently requires something like $15b. Where’s that going to come from? There’s a big question mark about the bailout from china. Therefore it’s as clear as daylight that an IMF program is around the corner. The government’s 100-day program, actually, has been about implementing IMF pre-requisites. It’s been doing what IMF would have wanted – cutting subsidies, slashing development, etc.

Now about the stock market, which is only very delicately placed at the present level. It has very strong support at around 37,000. It’s already shed around 10 of the 10-15pc drop predicted in the previous column. But should any bit of bad news drag it below this level and the next support will not come before 35,000. How much money is that making its way to Money Heaven?

Mr Market, therefore, does not appear too optimistic about development and earnings anytime soon. The contractionary monetary policy will cast a long shadow on the equity market as well as the real economy. And sooner or later we will officially sign an IMF bailout program, with yet more austerity to follow.