Rs100b wiped out
There was blood in the water on Monday but the sharks came in for the kill on Tuesday when the Pakistan Stock Market hemorrhaged Rs100 billion as desperate investors gave up upon reading news that IMF talks had stalled.
The PSX sunk 181 points on Monday and a severe 700 points on Tuesday. One hundred billion rupees may seem a lot, but do remember that the market is worth Rs8 trillion.
It did not help that forex followed suit: the rupee depreciated around Rs1.12 in a day against the US dollar in the interbank market after days of sunshine.
Chatter on Twitter seemed to indicate that the culprit was a news story in The Express Tribune.
سو ارب نکال دئیے فیک نیوز نے pic.twitter.com/kg7HFAVQAo
— Sanie Khan (@khan_sanie) November 9, 2021
These market developments come at a time when Pakistan’s talks with the IMF to resume the $6 billion bailout program appear to have “stalled”. The news everyone was referring to appeared in an English newspaper. Its headline read: “PM ‘drops’ plan to seek IMF chief’s help on $6b deal.”
This news had devastating effects on psx and exchange rate today
— anwar ul haq (@Anwar304Ul) November 9, 2021
According to the story, Prime Minister Imran Khan has dropped the plan to make a telephone call to the IMF MD Kristalina Georgieva and seek her intervention to resume the bailout.
The story, citing sources, reads, “The purpose of the telephone call was to seek Kristalina’s intervention to soften conditions on approval of the SBP bill.”
The story mentioned that the plan to call the IMF MD was discussed between PM Imran Khan and his adviser on finance and revenue Shaukat Tarin.
Tarin was invited as a chief guest at the Kamyab Jawan Convention in Islamabad Monday. Talking to journalists after the event, he was asked a question about whether the PM would call the IMF MD or not.
Tarin replied, “It is not needed anymore.” He didn’t categorically deny that there never was a plan for the PM to call the IMF MD.
On Wednesday, Tarin tweeted a denial of the news, calling the news “completely flawed and baseless.”
The news ‘PM drops plan to seek IMF chief’s help” is completely flawed and baseless. Such proposal was never under consideration. The media reporters in the ‘Kamyab Jawan’asked about PM call to IMF chief. My reply was that negotiations are in advance stage and no need for call
— Shaukat Tarin (@shaukat_tarin) November 9, 2021
It would be deliciously sexy to say that one news story brought the market down, but the truth is that our PSX is not that fragile. Investors knew this was likely to happen. They had been eyeing the IMF bailout talks for days. Nine days or so had passed with promises of some headway. Shaukat Tarin had been making pronouncements. The market was growing impatient. The news story gave the impression that the government was in a tight spot. And it is likely to shed a further 500 or so points on Wednesday unless someone smoothens the ruffled feathers.
This is how talks with IMF work, with the possible outcome of the release of a new tranche:
The first step is “technical level talks”. Here, secretaries of various departments sit with the IMF team and share data.
The next step is “policy-level talks.” In these talks, a delegation comprising finance adviser or minister, secretary for the finance division, and State Bank governor sit with the IMF. The Fund puts forward conditions that it wants Pakistan to meet. Then, deliberations are done on these conditions.
If these talks are successful, a “staff-level agreement” is reached and the IMF issues a statement on the agreement.
This agreement then goes to the Fund’s executive board for approval. After the approval, the tranche is released.
Pakistan’s agreement with the IMF appears to be stuck at the second level. Although the financial adviser has said that Pakistan and IMF have agreed in principle, the Fund has yet to release a statement on any such agreement.
Until the statement comes out, there is no confirmation about the staff-level agreement.
The Fund’s representatives in Pakistan have said that progress has been made, but declined to comment on when the statement will come out.
Since even the staff-level agreement hasn’t been reached, there is no way things can proceed because the IMF’s executive board can only give approval once they are presented with the agreement.
Without the board’s nod, Pakistan won’t get any money from the Fund.
The finance adviser said on November 1 that the statement on the staff-level agreement will come out in a day or two. But, it didn’t happen.
There have been a couple of points which are causing this impasse. The first is the amendment to the State Bank of Pakistan (SBP) Act.
The IMF wants the government to not borrow from the central bank, and they want the government to amend the SBP act and add this condition. The problem is that to amend the SBP act, the PTI government needs a two-thirds majority in parliament and right now, it doesn’t have the numbers for the amendment.
Shaukat Tarin has said that this has been conveyed to the IMF.
Another point of contention is the removal of sales tax exemptions extended to various sectors, increasing income tax and raising duties on luxury items. The government has agreed to withdraw these exemptions, but they want to do it through a Presidential Ordinance.
The IMF doesn’t want an ordinance, instead, they are asking the government to table a finance bill in parliament to withdraw these exemptions.
These sales tax exemptions amount to more than Rs500 billion, while the overall exemptions, including sales tax, income tax and duties, are over Rs1 trillion.
The government has committed these changes to the IMF but nothing has been practically done to implement them.
This has miffed the IMF. That’s why while the Pakistan side says that an agreement has been reached, nothing has come out from the other side.
The news gave people the impression that the talks with the IMF have not progressed as well as the government claims, and the Fund won’t be lending money any time soon.
Without the money from IMF, Pakistan has to look to other sources for precious dollars. It means reaching out to other countries to seek short-term loans. These loans won’t be cheap.
The market interpreted that the economy will come under strain in the coming days, so they rushed to take their money out. Subsequently, the stock market fell.
Without IMF money, Pakistan will find it tough to boost its dollar reserves and that will increase the US dollar’s value. Anticipating a rise in the dollar’s price, people rushed to buy it. Result: the dollar price increased on the back of high demand.
The market has had bad reactions to news like this before. Last month, the stock market lost more than 300 points because the news was published saying that talks between Pakistan and the IMF have hit a deadlock. The finance adviser denied that news as well.