Pakistan markets and country-specific ETF retreated Tuesday after the government said it is requesting a bailout from the International Monetary Fund to rein in a ballooning trade deficit and falling foreign exchange reserves.
The Global X MSCI Pakistan ETF (NYSEArca: PAK) declined 4.4% Tuesday and plummeted 21.0% year-to-date.
The new government under Prime Minister Imran Khan promised millions of new jobs and the creation of an “Islamic welfare state,” but it now needs to raise as much as $12 billion to head off what could be an economic meltdown from its widening trade deficit and diminishing forex reserves, the Wall Street Journal reports.
The bailout will likely force Islamabad to rein in spending and increase taxes. Pakistani officials also warned that it could cause cutbacks in the global infrastructure building program with China, along with IMF scrutiny of Pakistan’s financial obligations to China.
The U.S. has accused Beijing of “debt-trap diplomacy” and warned that any IMF bailout for Pakistan should not go toward paying off China.
Pakistan and Previous IMF Bailouts
Nevertheless, Chaudhry Fawad Hussain, Pakistan’s information minister, assured markets that Pakistan would be able to pass this hurdle. The country has received several bailouts from the IMF and paid them back before.
“Pakistan’s future is in safe hands,” Hussain said. “We will make Pakistan a powerful and stable country.”
Further dragging on the Pakistani market, the rupee currency slipped as much as 10% Tuesday to 137 rupees to the dollar in response to the bailout plea, but it has since regained ground to PKR128.5 to the USD. At the same time, the depreciating rupee will lead to higher inflation.
Tahir Abbas, vice president for investment research at brokerage Arif Habib, argued that traders are anticipating the IMF will want to see the rupee currency to depreciate to around 145 to the dollar. The weaker currency would make the country’s exports cheaper and imports more expensive.
“The IMF will want to see the economy cool off, to reduce demand in order to manage the current-account deficit,” Abbas said.
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