Pakistan’s stocks & currency hit record as economy improves

Special Report :
Pakistan’s stock market reached a new zenith last Friday, with the KSE-100 Index climbing 0.9% to end at a provisional 53,175.56, surpassing the previous record set in May 2017. This rally crowned the index as the best performer globally in dollar terms since late August, out of over 90 tracked by Bloomberg. The country’s overall economic condition has been on the upswing since the exit of PM Imran Khan who has been perceived to have an anti-US stance during his tenure.

The country’s financial landscape has been on the upswing following a crucial agreement with the International Monetary Fund (IMF) in July, which helped Pakistan steer clear of a possible sovereign default. This agreement has been instrumental in alleviating the dollar shortage and unlocking additional funding. The positive effects were further underlined by a growth in large-scale manufacturing in August, marking the first increase in over a year. Additionally, the IMF forecasts a 2.5% economic growth for Pakistan for the fiscal year beginning July, following a contraction in the previous year.

Pakistan’s aggressive measures against currency hoarding have resulted in an 8% appreciation of the rupee since September, making it the strongest global currency, as per Bloomberg data. The surge in the country’s dollar bonds, by approximately 90% in the past year, has been partly attributed to the IMF’s financial support bolstering fiscal confidence.

The bullish trend in the stock market was also supported by the State Bank of Pakistan’s decision to maintain its benchmark interest rate in October, marking the third consecutive hold, with analysts anticipating a stabilization in rates. The upcoming national elections set for February 8, after some delays, have also provided more political stability.

Analysts, however, urge caution moving forward, advising investments in sectors with dollar revenues or those with significant dividend yields, as per a report by Omer Chaudhry of AKD Securities Ltd. The forthcoming IMF review for a second loan disbursement in December and the impending elections are seen as key factors that will influence market dynamics.

In the currency market, after a slump to an all-time low in early September when the rupee fell to 307 against the dollar, the currency has made a significant recovery, now valued at 276.19 to the dollar. This recovery, recognized by analysts and attributed to government crackdowns on illicit dollar trades, positions the rupee as the top global performer, with expectations for further strengthening.

The clampdown included nationwide raids by the Federal Investigation Agency on exchange companies engaged in unauthorized dollar dealings. Moving forward, experts like Tahir Abbas from Arif Habib Limited suggest that the government should emphasize boosting exports and attracting foreign direct investments to further enhance the currency’s value.

Pakistan’s headline inflation soared to 29.2% in FY23 year-on-year, a sharp rise from 12.2% the prior year, with contributing factors including the depreciation of the rupee, reduced fuel and electricity subsidies, and supply chain issues, as reported by the World Bank. September saw inflation climbing to 31.4% due to elevated energy and fuel prices, per government data.

Since a significant portion of Pakistan’s inflation is tied to the rupee-dollar exchange rate, the strengthening of the rupee is expected to gradually ease inflationary pressures, although with some delay.