Pakistan's Prime Minister Nawaz Sharif will withstand calls for hisresignation by Pakistan Tehreek-e-Insaf (PTI) leader Imran Khanand cleric Tahir-ul-Qadri. However, the protests have weakened hisauthority, and an end to the demonstrations is likely to come as partof a deal with the powerful military elite to relinquish Sharif's controlof foreign affairs, which will undermine relations with India and putPakistan's fiscal reform progress in jeopardy.
The State Bank of Pakistan (SBP) held its benchmark policy rate at10.0% at its September monetary policy meeting, and we expect thislong pause to continue over the coming quarters. Despite a numberof structural disinflationary forces at play in the Pakistani economy,which should see the trend of consumer price inflation (CPI) headlower over the coming years, we have made an upward revision toour forecasts owing to the impact of the recent floods and renewedreform uncertainty. We forecast CPI to average 7.6% year-on-year(y-o-y) in Fiscal Year 2014/15 (July-June), from an average of 8.6%seen in FY2013/14.
The Pakistani government is moving ahead with its privatisationdrive, looking to raise at least USD2bn through the international saleof shares in Pakistani energy and banking companies. Successfulshare sales in sales in Oil and Gas Development Co and Habib Bankwould provide crucial support to the government's fiscal coffers, andpave the way for more privatisations over the coming year.
The recent political crisis and severe flooding throw into doubt ourrelatively strong real GDP growth forecast of at 4.0% for fiscal year2014/15 (July-June). The anti-government protests have disruptedbusiness operations to a degree over recent months, and willundermine business confidence. Meanwhile, the flooding seen inSeptember in major growing regions of the country will adverselyimpact production of key crops.
The Pakistani rupee looks set to continue weakening over the comingmonths due to the country's widening trade deficit, still-high inflationand lingering political uncertainty. We forecast an end-year targetof PKR105.00/USD and PKR110.25/USD by the end of 2015.
Major Forecast Changes
We have slightly revised our forecasts for the PKR and inflation. Wesee the rupee heading lower over the coming months, and forecastan end-year target of PKR105.00/USD and PKR110.25/USD by theend of 2015. Regarding inflation, we have revised up our averageforecast for Fiscal Year 2014/15 to 7.6%, from 6.5%, owing partiallyto the impact of recent floods.