Pakistan Market: IMF Program - EFF instead of SBA

Pakistan Market: IMF Program - EFF instead of SBA

The visiting IMF mission and the Government of Pakistan have reached a staff-level agreement on a 36-month arrangement totaling US$5.3bn under an Extended Fund Facility. The new program will be presented for approval before the IMF's Executive Board in early Sep'13 where it is expected that this will also lead to release of financing amounting to ~US$5bn from other multilaterals for infrastructure and development projects. While details are lacking, key elements of the new program are to widen the tax base, develop a comprehensive strategy to tackle the energy crisis, initiate structural reforms in the PSEs space and revive the privatization program. A key component of the new program is an extended repayment period of 10yrs which should allow Pakistan time to build its indigenous fx reserves.  Within the backdrop of Balance of Payments stability, investor attention should be drawn to corporate fundamentals where the market's forward P/E of 7.8x remains un-stretched. We see bullish momentum sustaining where our end-Dec'13 Index target is 23,300 points.

New IMF program: A staff-level agreement has been reached on a 36-month arrangement totaling US$5.3bn under an Extended Fund Facility (EFF). The new program, which will carry a floating interest rate of 3%, will be presented for approval before the IMF's Executive Board in early Sep'13 with the GoP reportedly wanting the program size to be increased to US$7.3bn. While details are lacking in the absence of a Letter of Intent, key elements of the new program, which is touted as home-grown, are to widen the tax base partly by phasing out exemptions granted through SROs, develop a comprehensive strategy to tackle the energy crisis and initiate structural reforms in the PSEs space, among others. 

Space to conduct reforms: Current fx reserves with the SBP imply an import cover level of less than 2 months which stands to fall to 1.5 months by end-3QCY13 considering upcoming IMF SBA repayments. Now, assuming the IMF EFF releases US$2bn across the fiscal year followed by disbursement by other multilaterals, the import cover at end-FY14 should easily recover to more than 2 months and higher particularly if the GoP's privatization program is revived and further FDI flows come in. Of particular importance is that the EFF carries a longer repayment period (10yrs in this case as per news reports) which should allow Pakistan time to build its indigenous fx reserves while following through with structural reforms.    

Further measures: In connection withC, the GoP has committed to phase-out tax exemptions earlier granted through Statutory Regulatory Orders (SROs). While potentially worrying e.g. sales tax exemption for the dairy sector has been notified through SROs, elimination of tax exemptions is likely to be gradual and should not be all-encompassing, in our view. Furthermore, taking our cues from news reports, we understand that the central bank may be encouraged to follow a tighter monetary policy while reducing the level of intervention in shoring up the exchange rate. In such case, we flag Banks, E&Ps, IPPs and selected exporters as potential outperformers.