The Pakistani rupee is expected to lose more ground to the US dollar during the next week if the State Bank of Pakistan does not intervene till the completion of the sixth review of the International Monetary Fund’s (IMF) $6bn loan programme.
The rupee continues to be affected by higher importers’ demand for the U.S. dollar, especially in the absence of capital inflows from central banks and other sellers. In addition, the huge trade deficit caused by massive imports and global oil prices poses a threat to currency stability.
The rupee closed at an all-time low of 177.71 against the US dollar on Friday. It depreciated by 0.69% in the following week.
“There is still some demand pressure and that could let the rupee weaken further, unless there is liquidity intervention in the foreign exchange market. The rupee seems to be trading at 178-179 levels in days ahead,” said a currency dealer.
The State Bank of Pakistan’s two important actions: increase in the cash reserves requirement for banks and a big hike in the interest rates last month hasn’t helped slow the domestic demand and inflation, and arrest the rupee’s free fall.
Pakistan and the IMF on November 21 reached a staff level agreement on policies and reforms needed to complete the sixth review under the Extended Fund Facility. The country will secure a $1 billion tranche of the IMF funding once its board approves it was following the implementation of the prior actions, especially on fiscal and institutional reforms. The government is likely to present a mini budget before the Parliament soon to end all exemptions on sales tax to secure the IMF funding approval.
The SBP’s Monetary Policy Committee is due to meet on Tuesday to review the economy and announce the interest rate decision. Analysts and markets expect the SBP to make a 100-150 basis points policy rate hike at its December 14 meeting, as it wants to combat a soaring current account deficit and increasing inflation.
According to a customer report from Tresmark, higher-than-expected imports in November and December, adjustments in temporary economic refinancing tools, profit repatriation, interest and principal repayment will put pressure on the rupee and contribute to imported inflation.
Somehow, this equation keeps returning to the International Monetary Fund, and it becomes more important to Pakistan’s economic stability every week.
Unfortunately, in a poll conducted by Tresmark, 21% responded that IMF loan resumption was ‘unlikely’, going up from 9% a week ago when staff level agreement was reported. “This change could be because of Pakistan’s recent stance on US’ ‘Democracy Summit’ and FO’s (Foreign Office) criticism of US for boycotting Beijing Olympics,” it said.
It is hoped that based on Pakistan’s current vulnerability, Covid resurgence and the Afghanistan effect, saner minds will prevail, it added.
So Pakistan will have to proactively manage the situation for the next 30 days till we hear from the IMF again, without letting the situation deteriorate to such an extent that pulling back becomes a challenge, it said.
“Based on this, we expect more policy interventions (and not rely only on rate hikes) by the SBP, administrative measures to control prices by the government and verbal interventions by both to rein in volatility.”