Economic trends in Pakistan indicate a challenging road ahead, with power politics and upcoming elections influencing short-term policy decisions rather than long-term effective strategies. The current IMF program is spanning three governments, including interim and outgoing administrations, and possibly the incumbent regime. These factors contribute to an uncertain outlook for economic recovery in the coming years.
Huge Uptake in Price Trends – Not Easy Reversal
One concerning trend is the significant increase in price levels, which is not easily reversible. The Consumer Price Index (CPI) for June 2023 has been reported at 29.4%, following four consecutive months of over 30% inflation. The average inflation for the fiscal year 2023 stands at 29.04%, primarily driven by the long-awaited base effect. Although there has been a marginal decline in inflation on a month-on-month basis, the overall declining trend remains worrisome.
Our base case forecast for CPI in fiscal year 2024 stands at 20%, but this projection is subject to the fluctuation of the Pakistani rupee against the US dollar. The looming debt repayments pose a risk to the Pakistani rupee, although the IMF program could help alleviate some concerns in this regard. The Pakistani rupee has recently appreciated by approximately Rs10 to Rs275/US$ in early trading.
However, the steps taken to secure the IMF deal appear to be inflationary in nature. The reported 30% increase in power tariffs alone could add 140 basis points to the annual CPI through its first-round impact. Additionally, the increase in Petroleum Development Levy (PDL) could either lead to higher retail fuel prices or limit the pass-on of any benefit from lower global oil prices, further contributing to inflationary pressures.
Pakistan Secures US$3bn IMF SBA
Pakistan has successfully secured a new IMF program under a Stand-by Arrangement (SBA) worth US$3 billion for the next nine months, subject to approval by the IMF Executive Board, which is expected by mid-July. This development aligns with our previous note highlighting the government’s increased efforts to close a deal with the IMF before the Eid break. The previous Extended Fund Facility (EFF) program expired on June 30, 2023, with only eight out of eleven tranches disbursed, amounting to approximately US$4 billion. The government aims to obtain the remaining US$2.5 billion through the fresh program. The SBA provides the government with the necessary fiscal space to execute the electoral process scheduled for October 2023. It also facilitates unlocking disbursements from other global lenders at a time when the central bank’s foreign exchange reserves are only sufficient to finance the expected Current Account Deficit for the next 12 months, while the country’s external debt obligations during the same period amount to US$23 billion.
Execution of Reforms Remain Crucial
The execution of reforms remains crucial to restoring investor confidence, which has been impacted by the delay in securing a deal with the IMF. The new IMF arrangement is expected to alleviate market concerns in the near future, but sustained market rally and valuation unlocking will depend on the successful implementation of the reforms, as highlighted by the IMF. Energy stocks such as OGDC, PPL, SNGP, and MARI are expected to attract interest, while UBL, BAFL, MEBL, HMB, BAHL, and MCB are preferred picks from the banking sector due to their attractive valuations. The cement sector, particularly MLCF, PIOC, and KOHC, is also favored. Furthermore, the pharmaceutical sector is recommended due to potential drug price increases, with AGP being reiterated as one of the top picks.
Federal Budget FY24’s Ambitious Targets
The Federal Budget for fiscal year 2024, announced in the second week of June, introduced ambitious revenue targets and significant expenditure allocations, while keeping the fiscal deficit targets relatively realistic at 6.5% of GDP. However, it is likely that further changes will be made to the budget following its announcement, possibly revising the fiscal deficit target to 6.3% of GDP. The reintroduction of withholding tax on cash withdrawals, primarily targeting non-filers, aims to promote documentation. However, previous instances of this tax have led to a decrease in transactions through the banking system, with minimal impact on tax collection or an increase in tax filers. Another anticipated adverse effect of this tax is an increase in currency in circulation, which has already risen from 24% to 30% over the past five years.
Decline in Pakistan Oil Marketing Companies’ Sale
The Pakistan Oil Marketing Companies (OMCs) experienced a significant decline in sales by 27% in fiscal year 2023, reaching a record low since fiscal year 2006 (excluding the COVID-19 period). In June 2023, Pakistan’s oil sales stood at 1.3 million tons, down 31% compared to the previous year but up 4% on a month-on-month basis. The increase was mainly driven by a 7% month-on-month rise in Motor Spirit (MS) and a 10% month-on-month increase in Furnace Oil (FO) sales. However, High-Speed Diesel (HSD) sales remained flat. MS sales for June 2023 increased by 7% month-on-month to 0.64 million tons, primarily due to seasonal effects and slightly lower prices. FO sales increased by 10% month-on-month to 100,000 tons due to higher demand for power generation. Total oil sales, excluding furnace oil, reached 1.2 million tons in June 2023, representing a 16% year-on-year decline but a 3% month-on-month increase.
Among the listed entities, Pakistan State Oil (PSO) experienced a 38% year-on-year decline in sales for June 2023, reaching 646,000 tons. This decrease was mainly driven by lower sales in FO (-97% YoY) and HSD (-22% YoY). Shell Pakistan (SHEL) saw its sales decline by 37% year-on-year to 95,000 tons, primarily due to a 53% year-on-year drop in HSD sales and a 20% decline in MS sales. Attock Petroleum (APL) also faced a 26% year-on-year decline in sales, amounting to 150,000 tons, driven by declines in FO (-46% YoY), HSD (-21% YoY), and MS (-7% YoY). PSO’s market share for June 2023 stood at 48%, down from 53% in June 2022 and 46% in May 2023. SHEL’s market share was 7.1% in June 2023, down from 7.9% in June 2022 and 6.9% in May 2023. APL’s market share reached 11.2% in June 2023, up from 10.4% in June 2022 and 9.5% in May 2023. Additionally, the average sale price of MS in fiscal year 2023 increased by 66% year-on-year, standing at Rs245 per liter compared to Rs148 per liter in fiscal year 2022. OMC sales, excluding furnace oil, totaled 14.5 million tons in fiscal year 2023, reflecting a 22% year-on-year decline and the lowest figure since fiscal year 2015 (excluding the COVID-19 period). PSO’s market share slightly declined to 50% in fiscal year 2023 compared to 51% in fiscal year 2022, mainly due to a significant decrease in FO sales (-64% YoY) compared to the industry’s decline of49%. SHEL’s market share remained at 7.6% compared to 7.7% in fiscal year 2022, while APL’s market share reached 9.6% compared to 9.3% in fiscal year 2022.
Power Generation Declines 16% Y/Y, Fuel Mix Improves
Power generation in Pakistan witnessed a 16% year-on-year decline. In May 2023, power production decreased by 16% year-on-year, reaching 12,284 GWh, primarily due to reduced economic activity and measures to curb the import bill. The fuel generation mix saw a year-on-year increase of 2.5/3.0/1.4 percentage points for hydro/coal/RLNG, while there was a decrease of 6.8 percentage points for RFO. Cumulatively, power generation for the first 11 months of fiscal year 2023 decreased by 10.5% year-on-year to 115,876 GWh from 129,402 GWh.
The improved generation mix led to lower fuel prices. In May 2023, the fuel cost stood at PKR 9.72/KWh, down 5.1% month-on-month and 13.2% year-on-year, although it remained higher than the reference fuel cost of PKR 7.83/KWh. The decrease in fuel cost was attributed to a 76.9% month-on-month increase in hydel generation and a 14.2% month-on-month decrease in the average fuel cost for coal plants. Lower coal prices and an improved Thar coal generation mix, accounting for 63.1% in May 2023 compared to 60.8% in April 2023, contributed to the decline in fuel costs.
Regarding specific power plants, the load factor of TEL and TNTPL increased to 63.4% and 96.5%, respectively, from 8.9% and 75.2% in the previous month. However, CPHGC’s utilization remained low at 3.5% (compared to 0.0% in April 2023) due to costly inventory and lower ranking in the merit order. In June, CPHGC’s merit order improved to 20th, indicating higher expected load factor from June 2023 onwards. PKGP remained unutilized, while LPL produced 8.9 GWh with a load factor of 3.4%, and NCPL generated 14.4 GWh with a load factor of 9.9%, incurring probable fuel losses. NEL, NPL, and KOHE generated 27.1, 45.9, and 35.8 GWh, respectively, with load factors of 17.1%, 31.6%, and 38.8%, expected to result in fuel savings. SPWL’s load factor increased to 59.5%, while the HUB base plant remained unutilized.
Looking ahead, an increase in power generation is anticipated in June 2023 due to higher seasonal demand. The fuel cost is expected to remain similar, with a likely increase in hydel flows and a further reduction in average coal fuel cost by approximately 18.9% month-on-month. Fuel loss plants, except for NCPL, are not expected to operate within our coverage in June 2023, as they are pushed further down on NEPRA’s merit list.
