There was blood in the water on Monday, but sharks came to kill on Tuesday when the Pakistani stock market hemorrhaged Rs100 billion as desperate investors gave up on reading the news that IMF talks were over. neutral point.
The PSX lost 181 points on Monday and 700 severe points on Tuesday. One hundred billion rupees may sound like a lot, but remember that the market is worth Rs8 trillion.
It didn’t help that the forex followed suit: the rupee depreciated around Rs 1.12 in one 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 item in The Express Tribune.
ارب نکال 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 package appear to be “at a standstill.” The news everyone was referring to appeared in an English newspaper. Its headline read: “Prime Minister ‘Abandons’ Plan to Seek IMF Chief’s Aid for $ 6 Billion Deal.”
This news had devastating effects on psx and the exchange rate today
– anwar ul haq (@ Anwar304Ul) November 9, 2021
According to the story, Prime Minister Imran Khan abandoned his plan to phone IMF Managing Director Kristalina Georgieva and seek her intervention to resume the bailout.
The story, citing sources, says: “The purpose of the phone call was to request Kristalina’s intervention to relax the conditions for approval of the SBP bill.”
The article mentioned that the plan to summon the IMF managing director had been discussed between Prime Minister Imran Khan and his finance and income adviser, Shaukat Tarin.
Tarin was invited as the guest of honor to the Kamyab Jawan convention in Islamabad on Monday. Speaking to reporters after the event, he was asked whether or not the prime minister would call the IMF managing director.
Tarin replied: “It is no longer necessary.” He did not categorically deny that there had never been a plan for the prime minister to call the managing director of the IMF.
On Wednesday, Tarin tweeted a denial of the news, calling it “completely flawed and unfounded”.
The news “Prime Minister abandons plan to seek IMF chief help” is completely wrong and unfounded. Such a proposal has never been considered. Journalists from ‘Kamyab Jawan’ asked about the Prime Minister’s appeal to the IMF chief. My response was that the negotiations are at an advanced stage and there is no need to call
– Shaukat Tarin (@shaukat_tarin) November 9, 2021
It would be deliciously sexy to say that news brought down the market, but the truth is, our PSX isn’t that fragile. Investors knew this was likely to happen. They had been eyeing the IMF bailout talks for days. About nine days had passed with promises of progress. Shaukat Tarin had made statements. The market was getting impatient. The report gave the impression that the government was in a difficult situation. And he’s likely to lose around 500 more points on Wednesday, unless someone smooths out the tousled feathers.
This is how the talks with the IMF work, with the possible outcome of the release of a new tranche:
The first step consists of “technical level interviews”. Here, secretaries from various departments sit with the IMF team and share data.
The next step is the “political level talks”. During these talks, a delegation made up of a financial adviser or a minister, a secretary of the finance division and the governor of the State Bank sits with the IMF. The Fund is proposing conditions that it wants Pakistan to fulfill. Then, deliberations are made 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 is then submitted to the Board of Directors of the Fund for approval. After approval, the tranche is released.
Pakistan’s deal with the IMF appears to be stuck at the second level. Although the financial adviser said Pakistan and the IMF agreed in principle, the Fund has yet to issue a statement on such an agreement.
Until the statement is released, there is no confirmation of the agreement at the staff level.
Fund representatives in Pakistan said progress had been made, but declined to comment on the date of release of the statement.
Since even the staff level agreement has not been reached, there is no way to proceed as the IMF Executive Board can only give its approval after the agreement is presented.
Without Board approval, Pakistan will not get any money from the Fund.
The financial adviser said on November 1 that the statement on the staff-level deal will come out in a day or two. But, that did not happen.
What is blocking the talks?
There were a few points that caused this impasse. The first is the amendment to the State Bank of Pakistan (SBP) Act.
The IMF wants the government not to borrow from the central bank, and they want the government to change the SBP law and add this condition. The problem is that in order to amend the SBP law, the PTI government needs a two-thirds majority in parliament and at the moment it does not have the numbers for the amendment.
Shaukat Tarin said this was passed on to the IMF.
Another point of contention is the removal of sales tax exemptions extended to various sectors, the increase in income tax and the increase in duties on luxury goods. The government has agreed to withdraw these exemptions, but it wants to do so through a presidential ordinance.
The IMF does not want an order, but asks the government to table a budget bill in parliament to remove these exemptions.
These sales tax exemptions amount to over 500 billion rupees, while the overall exemptions, including sales tax, income tax and duties, exceed 1000 billion rupees.
The government initiated these changes with the IMF, but nothing has been done to implement them.
This angered the IMF. This is why, while the Pakistani side says an agreement has been made, nothing has come out on the other side.
Why has the news caused so much panic?
The news gave people the impression that talks with the IMF have not progressed as well as the government claims, and that the Fund will not be lending any money anytime soon.
Without IMF money, Pakistan has to look to other sources for valuable dollars. It means reaching out to other countries to seek short term loans. These loans will not be cheap.
The market interpreted that the economy would be strained in the next few days, so they rushed to withdraw their money. Subsequently, the stock market fell.
Without IMF money, Pakistan will find it difficult to increase its dollar reserves and this will increase the value of the US dollar. Anticipating a rise in the dollar’s value, people rushed to buy it. As a result, the dollar price increased due to strong demand.
The market has already had bad reactions to such news. Last month, the stock market lost more than 300 points because news broke that talks between Pakistan and the IMF were at an impasse. The financial adviser also denied this news.
Follow SAMAA English on Facebook, Twitter, and Instagram.