Pakistan’s stock market experienced a significant surge as investors responded positively to the announcement of a new deal between Pakistan and the International Monetary Fund (IMF). The Pakistan Stock Exchange’s (PSX) benchmark KSE-100 Shares Index climbed 1211.51 points or 1.52%, reaching an unprecedented 81,155.60 points, up from the previous close of 79,944.10 points. This remarkable rise underscores investor optimism fueled by the expectations of macroeconomic stability and reformative measures linked to the IMF agreement.
The deal, a staff-level agreement (SLA) for a 37-month-long, $7 billion loan programme, comes with stringent conditions, including an increase in the tax rate on farm income. The announcement capped negotiations that began in May, following the completion of a short-term, $3 billion programme which had helped stabilize the economy, avoid a sovereign debt default, and set ambitious revenue targets in the national budget to secure IMF’s approval.
Since the signing of the previous SLA for the $3 billion standby arrangement, Pakistan’s benchmark share index has nearly doubled. The recent surge is also more than 10% higher since the presentation of Pakistan’s annual budget, indicating robust market confidence in the country’s financial management under the IMF’s guidance.
“The market has grown used to the IMF deal being a highly politicised news event and the IMF asking Pakistan to do more. This time it was a silent agreement between the government and the IMF staff,” commented Adnan Sami Sheikh, assistant vice president of research at Pak Kuwait Investment Company. This subtle approach appears to have reassured investors, reflecting in the market’s bullish behavior.
Raza Jafri, CEO of EFG Hermes Pakistan, echoed this sentiment, noting that the market’s positive reaction stems from the SLA’s potential to bolster macroeconomic stability and facilitate necessary reforms in critical sectors such as taxation and energy. The agreement also aims to promote more equitable fiscal spending between the central government and the provinces, which could lead to improved financial discipline and resource allocation across the nation.
Ahsan Mehanti, an analyst at Arif Habib Corp, highlighted that the all-time high in stock prices was influenced by investor speculation about potential easing of the State Bank of Pakistan’s (SBP) interest rates, which further fueled the bullish trend during the earnings season. Mehanti’s observation indicates a broader confidence in the economic measures accompanying the IMF deal.
The market’s recent performance also reflects the volatile political landscape. Last Friday, the stocks had a turbulent session, closing 48.26 points lower at 79,944.10 points, after a Supreme Court decision regarding reserved seats. This fluctuation underscores the sensitivity of the market to political developments and judicial decisions, which can significantly influence investor sentiment.
The new agreement with the IMF introduces an increased tax on agricultural incomes, a sector that has historically enjoyed lower taxation rates despite its substantial economic contribution. Agriculture accounts for 23% of Pakistan’s GDP, employs 35% of the labor force, and generates an annual income of approximately 9 trillion Pakistani rupees ($32.37 billion). By aligning agricultural taxation with corporate and other tax rates, the government aims to enhance its revenue streams and address recurrent fiscal deficits, a key condition for IMF’s support.
The IMF has secured commitments from both provincial and federal authorities in Pakistan to implement these taxation reforms. This move is expected to broaden the tax base, improve fiscal transparency, and ensure that all significant income sources contribute fairly to the national exchequer.
The IMF deal signifies a critical juncture for Pakistan’s economic trajectory, promising stability and reform in exchange for tough but necessary measures. The positive response from the stock market reflects a collective investor belief in the potential benefits of these reforms. As Pakistan embarks on this path, the implementation of these measures will be crucial in achieving sustained economic growth and stability.
