The Pakistan Stock Exchange benchmark for 3Q2022 was down 1% after falling 8% in 2Q2022. The index has now recovered 3% from its 2022 low of 39,831 hit on July 21, 2022.

This was on the back of the relaunch of the IMF program and expectations of increased foreign flows. As a reminder, the Executive Board of the IMF approved the release of a tranche of $1.1 billion under the Extended Financing Facility (EFF).

Expressed in US dollars, the index was down 11% in 3Q2022 due to currency depreciation. Lately, the intense monsoon season and flash floods have severely affected agricultural crops and caused damage to infrastructure, which has raised concerns about agricultural prospects and increased imports.

According to Bloomberg, Pakistan was neither among the best nor among the worst performers during the quarter. The Sri Lankan market grew by 33%, Argentina by 33% and Laos by 30% were the best performing markets during the quarter under review. On the other hand, Poland was down 27%, Ghana down 25% and Hong Kong down 23% were the worst performing markets.

During 3Q2022, average daily volumes traded in the Cash and Ready market fell 47% year-on-year, while they fell 12% quarter-on-quarter to 218 million shares. The average daily trade value fell 50% year-on-year and 4% quarter-on-quarter to 7.0 billion rupees.

Average daily trading volume in the futures market also fell 39% year-on-year and 14% quarter-on-quarter to 91 million shares. The average value traded fell by 47% year-on-year, while it increased by 6% quarter-on-quarter to reach 3.6 billion rupees.

The insurance sector was the biggest seller during the quarter with a net sale of US$40 million, followed by mutual funds (US$25 million and foreign companies (US$14 million). On the other hand, individuals (25 million US dollars), companies (13 million US dollars), and brokers (8 million dollars).

Key sectors that underperformed the market during the quarter included cable and power, auto assemblers and tobacco. However, the sectors that outperformed were technology, transport and cements.

Foreign inflows and debt relief

Pakistan’s foreign exchange reserves have remained under severe pressure lately and remain below 1.5 months of import cover. With Pakistan’s external financing needs (debt repayment and current account deficit) of over $32 billion, it is questionable whether Pakistan will be able to meet its financing needs or not.

However, with the recent floods and the damage they have caused to lives and infrastructure, debt relief and flood assistance are expected. UN Secretary-General Antonio Guterres recently suggested that a global financial institution grant debt swaps to Pakistan when debt repayment relief is diverted to tackling climate change.

The Asian Development Bank (AfDB) also said recently that it is considering providing Pakistan with US$2 billion in financing to help the country fight the devastation of the floods.

Alongside this, a request for debt relief from bilateral/multilateral sources, including debt relief from the Paris Club, has been made, which could provide respite from the country’s depleting reserves.

Pakistan has a total outstanding debt of $9.2 billion with the Paris Club and a projected debt service of $1.2 billion for FY23. Any debt relief or debt rescheduling from the Paris Club and expected foreign inflows from AfDB, friendly countries and other multilateral agencies will remain key in determining the market outlook.

IMF Position on Floods and Easing

Given the severity of the floods, Pakistan faces a big challenge in meeting the stringent external account and fiscal account targets set with the IMF for FY23. It will be interesting to see if the IMF foresees any easing during of its next review scheduled for November. A few newspapers quoted that the IMF agreed to grant easing on the increase in taxes on petroleum products and the adjustment of fuel charges on electricity tariffs for up to 3 months.

Commodity prices

The outlook for Pakistan’s economy will also depend on the future trend of commodity prices. International Arab light oil prices fell 15% in the quarter as fears of a global recession led to expectations of a further decline. Oil imports continue to account for more than 30% of Pakistan’s oil import bill as a sustained reduction in crude oil and commodity prices could ease pressures on the import bill and could also dampen the rise of inflation.

New finance minister

Ishaq Dar was recently appointed finance minister to replace Miftah Ismail. Ishaq Dar recently said he would focus on the problem of speculation in the currency market as he called Pak Rupee undervalued. He also pledged to control inflation and interest rates.

Since September 23, 2022, the rupee has gained against the US dollar in anticipation of the measures it will take to lower the exchange rate. Gasoline/diesel prices have also been reduced, albeit slightly for the next 15 days, starting October 1, 2022.