Question

You are recently hired in the Research firm where you got the assignment on forming a Capital Market Expectations. However, recent pandemic impede the growth numbers each of the business sector. State bank of Pakistan taken the significant measure to combat with the ongoing situation of Pakistan due to novel coronavirus. Your research head assigned you a task which is related to writing a brief report on “Revival of Economic Growth of Pakistan” which are mentioned below:-

1. Describe the inflationary pressure on Pakistan economy along with its future outlook with forecast of future monetary policy rate.
2. Pakistan Current Account came into surplus so what type of measures Govt. has taken to control the current account deficit, further, compare the last govt. period with incumbent govt. steps for improving the Pakistan economy.
3. What are the key determinants of PKR/USD rate and your view on future rate whether it’s going to devalue further or strengthen PKR against dollar?
4. Most importantly, net exports impact on the growth of Pakistan economy.
5. Lastly, you have to include the banking channel liquidity constraints due to Covid-19 and what steps SBP has taken for smooth operational efficiency of banks. (hint: CASA deposits, Advance to deposit ratios, Capital adequacy rate, liquidity coverage ratio and net stable funding ratios)

Instructions:

you need write a brief report (200 words) based on the data you have gathered what would be your analysis regarding the interest rate forecast keeping in mind the economic circumstances and international restrictions on Pakistan?

Answer 1

Inflation can defined as constant rise in price. The inflation was 3.93% in 2018 which increased to 6.74% in 2019 and again increased to 11.12%. The Inflation in Pakistan is increasing year by year from 3.93% to 11.12%. The inflation has almost tripled in just a period of three years. Due to the increase in the inflation, the prices of goods and services are sky rocketing. The basic commodities such as food, vegetables, fruits, milk, and other services has inflated. This leads to high prices which cannot be afforded by the poor and middle class families. This is also leading to disparities of income between the rich and poor. The rich are getting richer and poor are getting poorer due to inflationary pressures. The monetary policy rate is decided by the state bank of Pakistan. In order to control inflation, the bank has to increase the interest rate. Due to the increase in the interest rate, the amount of people taking loan shall decrease. This in turn, will decrease the purchase of goods and services. due to this, the price of goods and services shall decrease. This would eventually control inflation.

The current account of Pakistan is in surplus. The main reason of this is

1) Made exports cheaper

2) Made imports costly

3) Improve competitiveness of domestic firms against international firms.

4) Devaluation

Current account surplus occurs when exports are greater than imports.

The steps taken by current government to improvise economy in a better way than previous government are as follows:

1) The current government was been able to drop the fiscal account deficit by 80%.

2) There is a rise in foreign direct investment.

3) The reserves of State bank of Pakistan are at 21-month high.

4) The GDP of the country is increasing on a fast-pace.

The key determinants of PKR/USD rates are as follows:

1) Inflation

2) Interest Rates

3) Speculations

4) Balance of Payment

5) Public Debt

The current rate of $1 in Pakistan is 168.514 PKR as on 9/15/2020. According to technical analysis using RSI, Candle stick, ADX, Volume, Open Interest and Option chain. The following datas cite the probability of the Pakistan currency to strengthen in the upcoming year. The Pakistani currency shall become strong in comparison to USD.

The increase in net exports leads to the inflow of foreign exchange in the country. This helps to increase the production for increase in exports. Increase in exports leads to increase in employment, Demand, Flow of money and many more. So increase in Net exports can help the economy to grow.

The Covid-19 has affected the liquidity position of the banks in Pakistan. The central bank injected $7 billion or 2.5% of the GDP for liquidity purposes. The central bank also slashed its monetary policy by 100 basis points. The liquidity coverage ratio is projected around 16%. The overall financial health and free cash flow are in balance due to the active management and support of Government in Covid-19 pandemic situations.