Updated on Nov 08, 1999
As we had stated in the last weekly, the market continued to move
slowly towards over the week. The KSE 100 inched up 0.3% points over the week to close at
1193.54 points at the end of the week. The failure to break the 1200 levels displayed the
inherent and fragile nature of the market.
Institutional investors continued to remain apprehensive towards the
current situation, utilizing the current levels to reduce exposure in the KSE 100, Market
sentiments continued to remain under pressure, leading the current wave of anxiety is the
apparent vacuum of power. With the announcement of the new six members of the Cabinet,
investor concerns maintaining to this apparent delay will largely subside.
Foreign investors absence in the rings have been witnessed clearly in
the last weeks. The military takeover has made them awry of any further exposure in the
market. Even with the positive statements on the early solution of the IPP issue by the
Finance Minister Shaukat Aziz, the price of Hubco GDRs remained capped on the upside thus
further validating the apparent anxiety of the foreign investors towards the Pakistani
For the coming week, the KSE 100 is likely to witness major support
appearing around the 1150 levels. Initial resistance is likely to be felt around the 1200
levels with major resistance clipping the upward movement by 1220 levels.
The Anguish Of An IMF Debtor Nation
Whenever one hears about the release of IMF funds to Pakistan, there
has almost always been an underlying conditionality of devaluing the Pakistani Rupee. The
immediate reaction in the country is that the IMF is unaware of the ground realities in
Pakistan, and that the external account will suffer as a result of the devaluation. Well
here's how the IMF decides whether a member country needs to correct its currency.
The current account balance of a country is referred to as an
intermediate target, meaning a variable, which is both a broad reflection of the stance
macroeconomic policies and a source of information about the behavior of economic agents.
The country's balance on current account determines the change over time of a country's
stock of net claims on (or liabilities to) the rest of the world, it reflects the
intertemporal decisions of domestic and foreign residents, that is their behavior with
respect to saving, investment, the fiscal position and demographic factors. Movements in
the current account are, therefore, deeply intertwined with, and convey information about,
the actions and expectations of all market participants in an open economy.
The first step consists of estimating the current account balance that
would be likely to exist for the country under consideration if, at the currently observed
market exchange rates, the country is at a normal level of capacity utilization and all
lagged effects of past changes in exchange rates, prices, relative activity levels and
special and temporary factors had fully worked themselves into the current account (in
Pakistan's case this would be around a 3-4 month lag period). This would give the
underlying current account position.
The second step in their calculations involves working out the
sustainable level of the saving-investment gap in the economy. This is the level that
would be consistent with long-term equilibrium if the home country and its trade and
financial partners were all functioning with low inflation rates and appropriate rates of
capacity utilization, that is a current account position that can be financed by 'normal'
capital flows. This is calculated excluding any impact the exchange rate will have on
savings and investments.
The third step entails estimating the level of the country's real
effective exchange rate that would equate (1) as estimated in the previous steps and
comparing it to the prevailing market exchange rate levels. Should these two sides be wide
apart, then it is necessary estimate the exogenous real exchange rate needed to equate the
Having done that, one will have a measure of the misalignment of the
country's real exchange rate from the sustainable level, and hence a policy recommendation
for the country's exchange rate.
The all-important relation being:
Sustainable Current Account = Saving PRIVATE + Saving PUBLIC
- Investment PRIVATE - Investment PUBLIC (1)
Finally our opinion regarding depreciation of the Pakistani Rupee for
CY00 calls for a depreciation of 4-5%, because the government emphasis currently lies on
fiscal sustainability, which would only be hampered by the effect of a large depreciation
on the rupee value of debt-servicing. We believe that the 4-5 % depreciation if done in a
random spread-out manner (to limit the negating affects expectations as much as possible)
will keep real exchange rate fundamentals stable, so large realignments will not be
necessary (unless we decide to test our chemical warheads too!!!).