PAKISTAN’S stock market has been in a free fall since the beginning of this week, with the benchmark KSE-100 index losing more than 2,000 points in the last three days. Investors have reason to turn bearish on the country’s stocks: the government is changing the course of the economy from growth towards stabilisation. It has already accepted the harshest-ever IMF conditions that include ‘prior actions’, involving extreme monetary and fiscal tightening for the resumption of the loan programme to reduce pressures on the fragile external sector. Indeed, the market had been struggling for the last few months as investors fretted over the downgrade of Pakistan by MSCI, a deteriorating current account, uncertainty surrounding IMF funding, etc.

However, the current bloodbath has been triggered by aggressive monetary tightening by the State Bank days before Pakistan concluded the sixth review of the EFF programme for the revival of IMF funding. In spite of a hefty increase of 150bps in the key policy rate to 8.75pc, the market is anticipating more tightening. The central bank has indicated as much in its monetary policy statement, ditching its previous forward guidance of a “gradual and measured” raise in the rate and increasing the frequency of annual monetary policy reviews. With the government soon planning to introduce a mini-budget under the IMF agreement to raise additional tax revenues, and with six-month benchmark interest rates already crossing into double digits, businesses are seeing increasing costs and shrinking profits. It is hard to predict how long the bears will rule the trading floors in the absence of credible positive triggers, but it is clear that recovery will take a long time and cause much suffering to both businesses and the public. The bourse will continue to feel the aftershocks of the IMF deal for some time to come as the government and the State Bank steer the economy away from growth in order to keep receiving multilateral and bilateral dollars for sustaining the external sector.

Published in Dawn, November 25th, 2021