Pakistan election seen as crucial for IMF-backed economic reforms, brokerage says

Karachi: Pakistanis will vote on Feb. 8 to elect a new government for the next five years, in a crucial test of the country’s democracy and its ability to tackle the economic challenges ahead, a brokerage report said on Saturday.

The seal for the International Monetary Fund is seen near the World Bank headquarters (R) in Washington, DC. — AFP/File
The seal for the International Monetary Fund is seen near the World Bank headquarters (R) in Washington, DC. — AFP/File
Brokerage Topline Securities said a smooth transfer of power to an elected government would help ease concerns of lenders, including the International Monetary Fund (IMF), at a time when Pakistan is facing a severe external debt repayment challenge.

The IMF in its country report in July 2023, stated that the new Stand By Agreement (SBA), can play a crucial role in anchoring policies ahead of the national elections and until a new government is formed. The IMF team also met with leaders of major political parties in Pakistan to get assurances of support for key objectives ahead of final approval of a $3 billion SBA in July 2023, crucial to save the country from default.

“Another key area to look for is how the new government will manage economic challenges, especially to deal with the IMF for a long-term program,” the report said.

“Considering the not-so-pleasant experience with the PML-N nominated finance minister in the last opposition-led government of PDM, investors are eager to see the finance team of the new government.”

The report said the new government and its finance minister could play a significant role in negotiating with friendly countries for debt rollover or reprofiling and finalizing a new IMF program that requires a lot of painful reforms.

The brokerage said none of the major parties seemed to be addressing the key economic challenges faced by the country, and most of them were focusing on popular measures to gain public support amid record high inflation.

“Looking at the manifestos and promises of major parties, it seems no one is addressing the key economic challenges faced by Pakistan. Most of the parties focussing more on the popular measures to gain public confidence amid record high inflation.”

The report compared the performance of three large political parties – PML-N, PTI and PPP – in their last tenures and said PML-N and PTI had performed relatively well on key economic indicators, as endorsed by a recent news analysis by Bloomberg that used the Misery Index, a measure of inflation and unemployment.

The brokerage said the question investors were interested in was not who would win the elections but whether the new government would get a majority or if it would be a weak coalition government.

“We think that in case one party gets 50 percent plus seats, that will definitely boost investors’ confidence, and markets will react positively.

This will also give a positive signal to the IMF and other lenders. On the contrary, a coalition government with support of smaller parties will remain fragile and may struggle to implement the much-needed economic reforms.”

The report also said it would be interesting to evaluate the new government’s relationship with the military establishment.

“Pakistan has a poor history of worsening civil-military relationships that have badly affected the political continuity, with negative implications for the economy and the markets.”

The brokerage also noted that the election campaign was subdued compared to previous years, possibly due to lack of interest by political parties or lesser competition in most of the constituencies after the PTI party did not get its preferred “bat” symbol.

The report said the stock market recovery was likely to continue in 2024 and expected the benchmark KSE-100 total return index to reach 75,000 points by December 2024.

“However this is based on current low PE multiples without assuming any re rating amid high risk of debt sustainability.

We may also see a post election rally in line with historical trend,” it added. “Smooth transfer of power to new government after elections, new long term funding program from IMF and expected fall in Interest rate will be the key drivers of equities in 2024.”
Cotton prices jump 27pc in a month to hit season-high amid supply crunch

Karachi: Cotton prices in Pakistan soared to their highest level of the season this week, as textile mills scrambled to secure quality supplies amid a domestic shortage and rising global rates, industry officials said on Saturday.

Pakistani workers process freshly picked cotton at a factory at Khanewal in the central province of Punjab, Pakistan. — AFP/File
Pakistani workers process freshly picked cotton at a factory at Khanewal in the central province of Punjab, Pakistan. — AFP/File
The spot rate for cotton jumped to Rs19,700 per maund (40 kg), up 27 percent from Rs15,500 a month ago, according to the Karachi Cotton Association (KCA).

As of December 23, cotton prices in Sindh ranged from Rs15,500 to Rs17,800 per maund, while in Punjab, they ranged from Rs16,500 to Rs17,000 per maund, marking an increase of approximately Rs4,000 per maund.

Presently, cotton prices stand at Rs18,500 to Rs21,000 per maund in Sindh and Rs19,000 to Rs21,000 per maund in Punjab, with spot rates reaching Rs19,700 per maund.

The surge in cotton prices can also be attributed to a reduction in the supply of quality cotton in the local market, particularly due to large textile groups stocking up on quality cotton.

Previously, when the price of New York cotton futures ranged between 79 and 81 cents per pound, major groups were importing cotton profitably. However, with New York cotton futures climbing to approximately 86.50 to 87 cents, import deals became less lucrative, leading to a rapid increase in local cotton prices.

The acquisition spree by textile mills, especially in the past week and with the onset of the new year, has led to a significant rise in cotton prices, reaching up to Rs3,000 to Rs4,000 per maund.

Naseem Usman, chairman of the Karachi Cotton Brokers Association, said expectations are high for increased cotton sowing in the lower regions of Sindh, particularly in anticipation of higher yields, while early farming of cotton is also underway in various regions of Punjab, further contributing to the optimistic outlook for cotton production. It is estimated that cotton production in the country this season will reach approximately 8.4 million bales, with textile mills requiring around 13 million bales, indicating a shortfall that may necessitate imports.

Last year, nearly 1.5 million bales were imported to fulfil contractual obligations, with an additional 800,000 bales expected from Afghanistan. The reopening of the Afghan border after a 10-day closure and the potential reopening of the Chaman border offer hope for increased imports. In a recent meeting, the American Consul General in Lahore engaged in discussions with the All Pakistan Textile Mills Association (APTMA) to enhance trade and economic relations between Pakistan and the United States.

With the cotton industry facing concerns over declining domestic production, there is a pressing need to boost cotton cultivation.

In a proactive effort to invigorate the textile industry, the Sindh government has initiated work on the modernization of Karachi’s garment city. This industrial estate, dedicated to the production of value-added textile products, spans over 300 acres and marks a significant transformation. This initiative aims to promote industrial units and water treatment plants within the city limits to ensure favourable environmental conditions.

Addressing a seminar in Hyderabad earlier this week, director general of Agriculture Sindh, Munir Ahmed Jumani, highlighted the importance of cotton as the backbone of the country’s industrial sector. However, continuous declines in cotton production due to adverse weather conditions, water scarcity, and pest attacks are impacting cotton yields negatively.

Sajid Mahmood, a cotton broker, emphasized the need for technological advancements to double the average cotton yield per acre, from 700 kilograms to 1,500 kilograms. He also shed light on the significant losses incurred due to attacks by pink bollworms, estimating an annual loss of 1.5 to 2 million bales, which equates to a 0.5 percent increase in GDP and an additional billion-dollar burden on the economy.