Exclusive Analytical Article published in The Truth International magazine
No doubt Pakistan has been facing a serious financial crisis for the past many months that poses some crucial challenges to the economic revival and survival of the country. The resumption of the IMF program has averted the risk of default for Pakistan. However, the overall economic scenario in the country is still fragile in the absence of adequate external financial and inflows of foreign investment.
In recent months, some positive economic developments have taken place in the country which indicate the possibility of an economic turnaround gradually though the consumers will continue to experience shocks in the tariffs of the gas, and electricity, and an unending vicious cycle of record high inflation.
On top of the positive developments is the record-breaking growth in the stock market in Pakistan in recent weeks, particularly after the launching of a nationwide crackdown against the hoarding and smuggling of dollars and other tradeable essential items.
In the first week of December, 2023, the KSE-100 benchmark index surged to above 62,000+ points amid a persisting bullish sentiment in the stock market. The KSE-100 index has reached around 62000 level ahead of the experts’ anticipated deadline of December 2023. However, given ongoing robust trend in the stock market, analysts believe that the KSE-100 index could hit 65,000+ points at the end of 2023.
With the beginning of the New Year, the KSE-100 index would be fluctuating above the 70K level. The important factors driving the market forward in a fast gear are the reports of a smooth transition of power post-elections, a fresh long-term funding initiative from the IMF, and an anticipated decrease in the interest rate.
Meanwhile, in the past four and a half months, the index has surged by a substantial 44%, marking a net increase of 18,000+ points in the last week of November 2023. The forthcoming February 8, 2024 elections are anticipated to provide crucial political stability, with initial assessments indicating a high probability of the PML-N and its coalition partners securing a substantial number of seats. The other important economic developments in Pakistan are mentioned below.
Dollar-PKR exchange rate
In recent weeks, the value of the dollar has dropped to around 285 rupees in inter-bank trading and 286 to 287 rupees in the open market from a record high of 310 rupees in the inter-bank and 330 rupees in open market operations. The government’s countrywide crackdown against smuggling and hoarding and blacklisting of dubious exchange companies has reversed the value of the mighty dollar. The recent staff-level agreement between the IMF and Pakistan further discouraged unwanted flight of the dollar and it supported the value of PKR. In addition to it, this development played a vital role in giving an unprecedented boost to stock market trading in Pakistan.
$700 Million IMF tranche
The State Bank of Pakistan is expected to receive a $700 million next tranche from the IMF on December 8. The Board of the IMF is holding its meeting on this day and traditionally the tranche is transferred into the SBP’s account immediately after the board’s approval. The disbursement of the second IMF tranche will be a gateway to mop up more loans and foreign investment in 2024. As the IMF and Pakistan government have already signed the staff-level agreement, the next development will be the disbursement of $700 million next tranche from the fund in the early days of December 2023.
Saudi Company WAFI Acquires Shell Pakistan
WAFI Energy, a Saudi energy powerhouse, has completed the acquisition of Shell Pakistan. The company has disclosed it in a notice sent to the Pakistan Stock Exchange to meet a regulatory requirement. This agreement entails Shell Petroleum divesting its majority stake of 77.42% in Shell Pakistan Limited to WAFI Energy, marking a significant milestone in Pakistan’s energy sector for 2023. WAFI Energy has also corroborated this groundbreaking development on its official website today, solidifying the authenticity of the acquisition.
This strategic divestment by Shell aligns with its mobility network enhancement strategy, initially unveiled during Capital Markets Day in June 2022. The transaction, subject to regulatory approvals, is slated for finalization in the fourth quarter of 2024. Despite the shift in ownership, customers in Pakistan will retain access to Shell’s premium fuel and lubricants through brand licensing agreements, ensuring continuity of service. Shell Petroleum Company Limited underscores its commitment to upholding safe and reliable operations amidst this transition.
In a separate announcement to the Pakistan Stock Exchange, Shell Pakistan Limited revealed the formal intent from WAFI Energy LLC to acquire a controlling interest, surpassing regulatory thresholds under Section 111 of the Act, encompassing up to 77.42% of voting shares. WAFI Energy LLC, the exclusive Shell Retail Network licensee in Saudi Arabia, boasts a rapidly expanding retail gas station network, signaling its strategic prowess in the energy domain. Arif Habib Limited, a brokerage firm, confirmed its appointment as the manager for WAFI Energy’s offer, signaling its role in the acquisition bid and submission of a public announcement aiming to acquire the same substantial shareholding in Shell Pakistan Limited.
Earlier in June 2023, Shell Pakistan Limited had disclosed its parent company’s intent, Shell Petroleum Company Limited (SPCo), to divest its stake in the Pakistani entity. This development had been assured to have no disruptive effect on ongoing business operations.
Turkish Company Acquires Coca-Cola Pakistan
In October 2023, a Turkish company has successfully acquired Coca-Cola (Pakistan) for $300 million. The Competition Commission of Pakistan (CCP) granted approval for this acquisition in a phase-1 review under the Competition Act, 2010, and the Competition (Merger Control) Regulations, 2016. Coca-Cola İçecek (Turkey) acquired a substantial 49.67 percent shareholding of Coca-Cola (Pakistan) through its subsidiary, CCI International Holand, from Atlantic Industries. With this transaction, Coca-Cola Turkey secures the majority of shareholding in Coca-Cola (Pakistan) along with managerial control. This acquisition signals a strong belief in the Pakistani economy’s potential to yield substantial returns for international investors.
The Chairman and Mergers team have streamlined the merger system and process, expediting mergers and acquisitions applications to provide a smoother pathway for international investors seeking opportunities in Pakistan.
Pakistan-UAE Investment MoUs
Prime Minister Anwaar ul Haq Kakar has set out on a bilateral trip to the United Arab Emirates from November 26 to 28, 2023, aiming to fortify relations and encourage collaboration through the signing of multiple Memorandums of Understanding (MoUs). PM Kakar is holding important meetings with UAE President Sheikh Mohamed bin Zayed and other top UAE officials. This interaction serves as a significant opportunity to bolster various aspects of bilateral ties, spanning political, economic, trade, investment, cultural, defense, and people-to-people connections.
The agenda includes the signing of MoUs between Pakistan and the UAE across diverse sectors such as Energy, Port Operations Projects, Waste Water Treatment, Food Security, Logistics, Mining, Aviation, Banking, and Financial Services to facilitate investment cooperation.
Mega Saudi Investment Expected in Reko Diq
A Pakistani official revealed Saudi Arabia’s keen interest in acquiring government stakes in Pakistan’s Reko Diq gold and copper mine, marking a significant prospect for the struggling $350 billion South Asian economy. Barrick Gold Corp, holding a 50% stake in the mine, views it as one of the globe’s largest untapped copper-gold regions. Pakistan had previously indicated Barrick’s planned $10 billion investment in the project. In August, Barrick expressed willingness to involve Saudi Arabia as a partner in the mine. Khan, a Pakistani official, highlighted the likelihood of Saudi Arabia and other traditional Middle Eastern allies contributing up to $70 billion in investments across various sectors.
The Current Account Deficit Shrinks Sharply
In October, the year-on-year reduction in the current account deficit (CAD) was a substantial 91%, yet on a month-to-month basis. The State Bank of Pakistan’s most recent data indicated that the deficit stayed within the projected range. The SBP governor had foreseen the CAD to remain comfortably below $100 million in October and anticipated continued containment throughout 2023-24. October witnessed a CAD of $74 million, a significant drop from the $849 million recorded in the same month in 2022, marking a contraction of 91.2%. This alignment with the SBP’s strategy occurred despite a relaxation in import restrictions.
The IMF, in its recent review preceding the Staff-Level Agreement for the second tranche release under the $3 billion Stand-By Arrangement, stressed the need for Pakistan to liberalize imports. However, this move might raise the trade deficit and subsequently the CAD. In FY23, strict import bans led to an 87% reduction in the CAD. Despite the easing of import limitations, banks still face constraints in opening letters of credit (LCs) for imports. The scarcity of dollars in the interbank market persists, with many banks unable to supply sufficient dollars for sizable LCs. Although October witnessed a rise in remittances to $2.5 billion, the four-month total experienced a 13.3% decline. This reduced influx could contribute to a higher CAD by the end of FY24.
Encouragingly, during the initial four months (July-October), the CAD shrank by $2 billion, a positive signal for the country’s economic overseers. SBP data from July-October FY24 indicates a CAD of $1.06 billion, down from $3.1 billion in the same period the previous year. This contraction might aid the government in meeting its foreign debt servicing obligations, which stand at $25 billion for FY24. SBP data further notes a $170 million rise in goods exports to $9.77 billion during July-October, while imports saw a substantial $4.2 billion decrease to $21 billion. Service exports and imports also experienced respective increases of $78 million and $534 million.
Remittances show stunning growth in October 2023
Overseas Pakistanis sent a noteworthy $2.46 billion in remittances in October, marking a seven-month peak and a substantial 12% increase from the previous month’s $2.21 billion. Compared to October 2022’s $2.25 billion, remittances also saw a year-on-year surge of 9.58%.
For half a year, remittances hovered within the $2-2.2 billion range. However, October witnessed a widespread improvement, notably bolstered by contributions from the United Arab Emirates and Saudi Arabia, jointly responsible for 60% of the month’s overall increase. The government’s crackdown on illegal foreign exchange trading, initiated in early September this year, followed by SBP-led structural reforms in the exchange companies sector, led to a narrowing of the gap between interbank and open market exchange rates.
Forex Reserves Drop by mid-Nov
The foreign exchange reserves held by the State Bank of Pakistan (SBP) fell by $217 million _ to $ 7.18 billion on November 17, 2023. The central bank attributed this decline in reserves to debt repayments. According to the latest data of the SBP, the total national foreign reserves stood at $12.30 billion during the week ending on 17th November 2023.
Saudi Aramco Oil Refinery Project facing delay: The Energy Division says the project is intact
The Ministry of Energy’s Petroleum Division took to social media platform X (formerly Twitter) on November 22, 203, to dismiss media claims about Pakistan’s $10 billion refinery project with Saudi Aramco facing uncertainties. The Energy Division labeled such reports as ‘baseless’ and ‘contrary’ to the actual facts.
Emphasizing ongoing discussions with the company, the Ministry clarified that the government was actively engaged in finalizing the project’s scope and is exploring opportunities to involve additional investors. This clarification followed recent media speculations hinting at Saudi Aramco’s purported lack of interest in investing in the refinery project.
Earlier, in July 2023, the Oil and Gas Development Company Limited and Pakistan State Oil had signed a Memorandum of Understanding (MOU) with Saudi Aramco, solidifying a joint investment strategy aimed at establishing a $10 billion Greenfield refinery project. The project, nonetheless, is still to take off despite much effort by the caretaker government in Pakistan.
