The New Economic Mix

Wed Dec 06 2023
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Shahzada Ahsan Ashraf

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Room rates have quadrupled, and rent-a-cars are unavailable as COP28 takes center stage in Dubai. World leaders, ministers, and influential figures, including Sequoias, Khosla, and Bezos, are ready to invest. COP28 (Conference of Parties) represents a crucial opportunity to steer the world towards a more sustainable path. COP28 matters!

It is, therefore, no surprise that the IMF has insisted that Pakistan’s next budget must adapt to climate change demands. Major buyers of Pakistan’s produce will soon require compliance with an extensive checklist of SDGs, necessitating stakeholders to adapt on a fast-track basis if they wish to remain competitive. This adaptation should commence now.

US Investors Betting Interest Rates Have Peaked

Interest Rates

In the US, investors are increasingly betting that the Fed will soon commence cutting interest rates. This bet gained momentum last week, sparking the most robust rally in bonds in 40 years and pushing yields just below the 4% mark. The Dollar Index also marginally retreated.

This rally was triggered by the Personal Consumption Expenditures (PCE) index, which clocked in at 3% in October from a year ago, falling from 3.4% the previous month. This index is widely considered the Federal Reserve’s preferred gauge of inflation, and although the reading still exceeded the Fed’s 2% target, the trajectory is clearly lower.

Interest Rate Expectations in Pakistan

Pakistan's Economic Renaissance, Hope, Challenges, economy, International Monetary Fund, IMF, growth,

Two developments have halted the much-anticipated policy rate cut in Pakistan: 1. Rising SPI & CPI, primarily due to revisions in gas tariffs. 2. A pushback by bond traders seeking higher yields. Inflation is expected to decline in the Jan-Mar quarter, but it’s too early to predict where the policy rate will land in the next MPC. However, a dovish stance by the Fed would certainly help justify a rate cut here.

Currency Outlook

currency rates

Last week, we opined that FX would be range-bound but subject to news flow. Consequently, the Rupee marginally strengthened, although the two factors cited for its strength were quite immaterial: 1. Reserves rose by US$90mn, and 2. The trade deficit shrunk by 33% on a YoY basis. However, the lion’s share of the trade deficit reduction was in imports, not an increase in exports, which is quite disappointing.

Continuing the trend of news flow, the market widely expects the IMF Board of Directors to approve the 2nd tranche on Thursday. Although the amount is a mere $700mn, it could drive USDPKR to the 280-282 levels, prompting the Central Bank to resume dollar buying to bolster its reserves.

As with the Climate Change initiative, stakeholders (GoP, Regulators, Businesses) need to focus on reforms and, in general, increase the productivity levels of the nation for it to grow at reasonable levels.

Shahzada Ahsan Ashraf

The writer is a Former Chairman and CEO of PIA. Former Federal Minister for Industries and Production.

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