Pakistan stocks plummet amid questions over IMF bailout

Pakistan’s main share index plunged by 2.35 percent on Monday, amid investors’ concerns over the conditions for a $6 billion International Monetary Fund (IMF) bailout. (AFP/File Photo)
Updated 13 May 2019
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Pakistan stocks plummet amid questions over IMF bailout

  • The Karachi Stock Exchange KSE100 Index started the day positively before bearish sentiment took hold
  • A lack of clarity around the precise actions needed to secure the IMF loan has “prompted speculation”

KARACHI: Pakistan’s main share index plunged by 2.35 percent on Monday, amid investors’ concerns over the conditions for a $6 billion International Monetary Fund (IMF) bailout package announced the day before.
The Karachi Stock Exchange KSE100 Index started the day positively before bearish sentiment took hold, with the index closing below 34,000 points.
“The market opened on a buoyant note before panic-prone investors started to jettison shares,” said Muhammad Faizan, an analyst at brokerage Next Capital Limited.
Faizan said this occurred due to concerns over tough conditions attached to the IMF bailout package, leading to heavy sell-offs in the market.
A lack of clarity around the precise actions needed to secure the IMF loan has “prompted speculation about further currency devaluations and interest rates increases,” Bloomberg reported.
According to Ahsan Mehanti, chief executive at Arif Habib Commodities, a capital market company, an “expected increase in taxes and utility prices, sharp fall in expected growth rate, projections for 6.5 to 7 percent fiscal deficit to GDP, and expected tightening in (State Bank of Pakistan) policy rates played a catalyst role in (the) bearish close” to shares.
With inflation climbing to over 8 percent, the rupee losing a third of its value over the past year, and foreign exchange reserves barely enough to cover two months of exports, Pakistan was forced to turn to the IMF for its 13th bailout package.
Pakistani authorities and the IMF on said on Sunday they had agreed a $6 billion package over the next three years to meet foreign debt obligations. But the loan is subject to IMF management approval and the timely implementation of the fund’s conditions.
Outlining critical steps Pakistan needed to take for fiscal strategy, the IMF said the upcoming budget, to be announced this month, would aim for a primary deficit of 0.6 percent of GDP supported by tax policy measures.
Economists said that the impact of the IMF bailout program and the promises made to secure the money by Pakistani authorities will be reflected in this month’s budget.
“The most prominent thing in the budget would be the imposition of around 700 billion rupees ($4.95 billion) in new taxes,” Hafeez Pasha, former finance minister, told Arab News on Monday.
“The major portion of taxes will be through the reduction of exemptions being given on many items including medicine, medical equipment and fertilizers,” he said, adding that the removal of the exemptions would have a huge impact on ordinary citizens.
The IMF has asked that Pakistan’s deficit be reduced to between 1 and 1.5 percent of GDP, which will mean a deficit of up to 750 billion rupees will need to be curtailed.
“The problem is that what we pay in debt servicing will have to continue as there is no space for reduction. The fiscal space is available in your defense and development budgets and the choice is yours,” Pasha said.
Some experts believe that the agreement will boost the confidence of investors and end the long-prevailing uncertainty from nine months of IMF negotiations. Others say the bearish sentiment on Pakistan Stock Exchange trading is here to stay.
“The movement of currency will now be based on demand and supply bases. At the month end when debt payment nears, we will see shocks in the currency market,” Muzzammil Aslam, a senior economist, told Arab News.
“As per the real effective exchange rate, the Pakistani rupee is close to its equilibrium, and there is only 2 to 3 percent room for further devaluation.”
The IMF forecasts Pakistan’s economic growth slowing to 2.9 percent this fiscal year from 5.2 percent in 2018, while the central bank has cut its estimate to between 3.5 and 4 percent.
Aslam underlined the need for a strong regulator in the market.
“If there arises any demand and supply issue and the central bank is not allowed to intervene, then the market can do anything,” he said.


British Steel collapses, threatening thousands of jobs

Updated 59 min 1 sec ago
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British Steel collapses, threatening thousands of jobs

LONDON: British Steel Ltd. has been ordered into liquidation as it struggles with industry-wide troubles and Brexit, threatening 5,000 workers and another 20,000 jobs in the supply chain.
The company had asked for a package of support to tackle issues related to Britain’s pending departure from the European Union. Talks with the government failed to secure a bailout, and the Insolvency Service announced the liquidation on Wednesday.
“The immediate priority following my appointment as liquidator of British Steel is to continue safe operation of the site,” said David Chapman, the official receiver, referring to the Scunthorpe plant in northeast England.
The company will continue to trade and supply its customers while Chapman considers options for the business. A team from financial firm EY will work with the receiver and all parties to “secure a solution.”
“To this end they have commenced a sale process to identify a purchaser for the businesses,” EY said in a statement.
The government said it had done all it could for the company, including providing a 120 million pound ($152 million) bridging facility to help meet emission trading compliance costs. Going further would not be lawful as it could be considered illegal state aid, Business Secretary Greg Clark said.
“I have been advised that it would be unlawful to provide a guarantee or loan on the terms of any proposals that the company or any other party has made,” he said.
Unions had called for the government to nationalize the business, but the government demurred.
The opposition Labour Party’s deputy leader, Tom Watson described the news as “devastating.”
“It is testament to the government’s industrial policy vacuum, and the farce of its failed Brexit,” he said in a tweet.
The crisis underscores the anxieties of British manufacturers, who have been demanding clarity around plans for Britain’s departure from the EU. Longstanding issues such as uncompetitive electricity prices also continue to deter investment in UK manufacturing, said Gareth Stace, the director-general of UK Steel, the trade association of the industry.
“Many of our challenges are far from unique to steel — the whole manufacturing sector is crying out for certainty over Brexit,” Stace said. “Unable to decipher the trading relationship the UK will have with its biggest market in just five months’ time, planning and decision making has become nightmarish in its complexity.”
Greybull Capital, which bought British Steel in 2016 for a nominal sum, said turning around the company was always going to be a challenge. It praised the trade union and management team, but said Brexit-related issues proved to be insurmountable.
“We are grateful to all those who supported British Steel on the attempted journey to resurrect this vital part of British industry,” it said in a statement.