Saudi Arabia's rescue package and financial support promise from China do not check the need for Pakistan's entrance into the International Monetary Fund (IMF) loan program due to the size of the funding gap.
So far the government has a conventional promise of $9 billion – $6 billion from Saudi Arab and $3 billion from UAE – which can grow to $13 to 15 billion.
"Although a drop in current account deficit, we consider the size of the deficit remains high for two reasons: current FX (foreign exchange) reserves situation and imminent repayments, more skewed towards 2HFY19," BMA Capital said in a report.
"Given the funding gap of $8 10 billion, the government will also need to build up foreign exchange reserves by issuing Euro/overseas bonds and seeking support from friendly countries."
The brokerage said the indecision about the entry in a fresh IMF program exacerbates the situation.
"We consider the government's much-awaited decision to seek IMF support is a step in the right direction and therefore set the stage for a much-needed repair of Pakistan's external account," it added.
"We are hopeful on Pakistan meeting precondition and expect tangible progress by mid-January 2019." Current account deficit (CAD) is predictable to drop to $13.5 billion in FY2019 and $8.5 billion in FY2020. The estimate does not comprise deferred oil facility of $3 billion as agreed with Saudi Arabia.
"Supported by gentleness in crude oil prices and hold back in economic activity, the outlook on CAD has improved," BMA Capital said. The brokerage said economic growth seems to be a predictable victim of the fundamental objective of consolidation and slowing down domestic demand.
"While we understand the government's recent policy actions on monetary policy and exchange rate fronts, we continue to see more room for similar stabilization measures ahead, predominantly focused on the fiscal side."
BMA Capital predictable key focus areas to contain fiscal deficit at five percent in FY19 to decrease in subsidies, cut in spending on social support, an option of new corporate tax, or additional tax on banks, an increase in general sales tax.
"We now expect Pakistan's GDP growth rate to drop to 3.7 percent in FY19 versus our previous estimate of 4.6 percent," it said. The brokerage said risks to growth outlook stems from the expected lower growth in agriculture and large-scale manufacturing sectors.
BMA Capital anticipated inflation to pick further up. "(Rupee) depression, increase in utility prices, and an increase in import duties will likely drive up inflation from an average of 3.9 percent in FY18 to 7.2 percent in FY19."
Yet, the inflationary spurt has seen in 2008 – 20 percent monthly consumer price index inflation – is unlikely to be repeated. "The two major drivers of inflation, oil prices, and agriculture products are largely in control," the brokerage said. "We expect the central bank to raise policy rate by at least another 50 basis points in the third quarter of this fiscal year before pausing its rate hike campaign."
