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Pakistan Day: time to reckon

Pakistan Day is celebrated with great fervor every year, but this year the circumstances are very different. People are living under extreme fear due to coronavirus pandemic, not only in Pakistan but around the world. The death of dozens of people from the pandemic, reminds us hundreds and thousands of people, who were assassinated after the partition of subcontinent. This also reminds the helplessness and the difficult administrative and financial conditions prevailing at that time. At that time Pakistan emerged strong only because people were united and had the resolve.

Around this time the country has a robust administrative structure, financial conditions are strong and above all people also have the determination to overcome this pandemic. On top the multilateral institutions as well as the lender of last resort, International Monetary Fund (IMF) are willing to support the countries under distress. Since the economic activities have been reduced to the lowest level, the first and far most effort should to ensure ample availability of daily consumables and not to go for panic buying or hording. It is time to show that we, as a nation, care for under-privileged people. People look towards those at the helm of affairs to come up with extraordinary measures because the circumstances are extraordinary.

The urgency of swift, drastic and extraordinary monetary policy response to minimize the adverse affects of pandemic has increasingly roiled investor sentiment. Both the severity and drastic nature of the shift from a bull to bear stock market have caught investors off-guard with the benchmark mark index of Pakistan Stock Exchange (PSX) losing almost one-third of its value from its CY20 high of 43,218 points seen only two months ago. The downslide is firmly centered on the period since the first confirmed cases of in Pakistan. A snapshot of operational and profitability impacts over the market indicates negative spillovers for Banks, E&Ps, Cements, Textile Composite, OMCs and the Auto space constituting a cumulative 47% of the Index weight.

Out of sync with global central banks vis-à-vis aggressive quantitative steps, the State Bank of Pakistan (SBP) has reduced the policy rate by a modest 75bps. At the same time, adjustment in the interest rate corridor renders the 75bps cut to just 25bps on the savings rate provided by Banks – a clear negative for the earnings of the heavyweight sector. Announcement of the Temporary Economic Refinance Facility (TERF) entailing subsidized capex facility is baffling at a time of economic slowdown, indicating cluelessness of the SBP.

A better alternative would have been a subsidized working capital facility for stressed industries. Current move by the SBP indicates likely cautious easing moving ahead where inflation numbers potentially in the wake of pressures particularly on the Food side may make a larger cut indigestible. This seems counter-intuitive and contrary to steps undertaken in major economies in the wake of a global slowdown. From market’s perspective, the PSX is likely to tread the same path as international markets. Recent developments including the spike in cases within Pakistan as well as partial shutdown of major cities currently underway does not bode well for the broader economy. Investors are recommended to stay on the sides.

Adhering to the age old axiom, ‘extraordinary times call for extraordinary measures’; central banks around the globe are aggressively slashing rates to mitigate economic adversity arising from the pandemic. The recent sharp rise in the number of confirmed cases in the country has brought a sense of urgency to elicit a strong policy response both monetary and otherwise. For an economy already in the midst of a slowdown, further downsides are apparent. The industry players hint towards further slowdown. Exporters are facing delay or cancellation in orders from clients, particularly the EU, the impact of supply disruptions particularly from China are likely to take effect in the next few weeks. With visible slowdown in economic activities and potential for the private sector to face heightened stress, the SBP can deviate from its monetary policy framework of inflation targeting through an aggressive rate cut.

It is worth noting that Indonesia, Australia, the Philippines and Taiwan cut benchmark rates on Thursday, in moves aimed at stemming the economic hit from the new coronavirus pandemic. The steps follow recent easing moves last week by the US Federal Reserve, the Bank of Japan and the European Central Bank. The measures have done little to stop stock market slide, with many analysts saying fiscal policy is more effective.

Analysts see enough policy space for an assertive reduction in the policy rate at this juncture to cushion the country’s growth momentum and uplift market confidence amid stronger headwinds. The SBP should be prepared to use its full range of monetary instruments and to deploy regulatory relief measures as needed in fulfillment of its price and financial stability mandates. Analysts demand SBP to roll out additional measures to ease liquidity conditions further such as the lowering of the term deposit facility volumes and or reductions in reserve requirements in the near term. The primary goal should be to keep enterprises operating. If these fail to have enough cash flow, liquidity, the capacity to repay debt will become a problem. It must be kept in mind that the central has lowered the interest rate this time not to stimulate economy, but to help enterprises continue their operations.

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