Why the Market Rallies First (Even When Austerity Is Coming)
This is counterintuitive but logical.
PSX is pricing:
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Lower probability of default
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Lower probability of capital controls
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Lower probability of forced devaluation chaos
It is not pricing:
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Tax hikes
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Energy price increases
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Slower GDP growth
Those hit later.
The Long-Term Drag: Austerity Is Not Market-Friendly
Multiple empirical studies show mixed outcomes:
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1997–2017 GARCH study: IMF lending announcements had a statistically significant negative effect on PSX returns over time due to growth suppression.
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2015–2022 regression studies: Short-term positive correlation, inconsistent longer-term results.
Why?
Because IMF conditions typically include:
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Fiscal tightening
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Subsidy removal
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Higher energy tariffs
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Tax expansion
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Slower domestic demand
This compresses margins and volumes after the relief phase.
Why 2023–2025 IMF Cycles Look “Different”
This time, markets reacted more strongly. Why?
Three reasons:
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Starting point was collapse-level risk
Reserves near $4bn meant default was priced in. -
Rate cycle turned supportive
SBP moved from 22% → ~10.5% (see TradingEconomics data you shared). -
Domestic liquidity replaced foreign flows
Retail participation surged (15,287 new UINs in Dec-25 alone).
IMF didn’t create growth—it removed panic.
Which PSX Sectors Benefit Most During IMF Programs
Short-Term Winners
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Banks (rates, liquidity, government paper)
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Energy (policy protection, cash flows)
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Fertilizers (subsidy logic, agri stability)
Medium-Term Losers
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Autos (unless rates fall meaningfully)
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FMCGs (price controls, inflation politics)
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Highly leveraged cyclicals
IMF cycles favor balance sheets, not stories.
