The Pakistani currency witnessed a marginal recovery of 0.02% or Rs0.07, reaching Rs285.35 against the US dollar in the interbank market on Tuesday. However, financial experts are projecting another round of currency depreciation as the revival of the IMF loan programme draws near.
The International Monetary Fund (IMF) has once again reminded the government to fulfil three conditions in order to resume its $6.5 billion loan programme. These conditions include reinstating the market-determined exchange rate. Prime Minister Shehbaz Sharif engaged in discussions with IMF Managing Director Kristalina Georgieva to revive the stalled bailout package before it expires on June 30, 2023.
The IMF’s reminder regarding this condition suggests that the government has recently reinforced its control over the exchange rate.
Speaking to The Express Tribune, Tahir Abbas, Head of Research at Arif Habib Limited, highlighted the difficulty in estimating the rupee-dollar parity if the government reinstates the market-determined exchange rate. However, he cautiously projected, “We may see another round of rupee depreciation of 5-10% if we choose to fulfil the IMF condition.”
A depreciation of 5-10% could potentially push the rupee to a new record low within the range of Rs300-310/$. On May 11, 2023, the exchange rate reached a new all-time low of Rs299/$ in the interbank market due to increased political uncertainty following the arrest of former Prime Minister Imran Khan and subsequent law and order issues.
In contrast to the consolidation in the exchange rate around Rs285/$ in the interbank market, the open market has witnessed a continuous downward trend in recent days, indicating that the government has regained control over the rupee in the interbank market.
According to the Exchange Companies Association of Pakistan (ECAP), the rupee experienced a fresh drop of 0.32% or Rs1, reaching a new all-time low of Rs312 against the US dollar in the open market on Tuesday. As a result, the gap in the exchange rate between the interbank and open market has widened to nearly a record Rs27.
There are indications that this gap could be even larger, as some currency dealers reportedly bought the domestic currency at up to Rs320 against a dollar in the open market, according to market sources.
Ismail Iqbal Securities, Head of Research, Fahad Rauf said, “The widening spread between the two markets is one of the reasons why the IMF reminded Pakistan of the condition for reinstating the market-based exchange rate.”
“The rupee may depreciate to Rs305-310/$ in the interbank market if the IMF revives its programme before new external loans arrive from friendly countries and donor agencies,” added Rauf.
The two experts mentioned that while the currency may not depreciate in the interbank market, it may experience a partial recovery in the open market if Pakistan secures new foreign funding prior to the programme’s resumption.
Discussions within domestic financial markets suggest that China and Saudi Arabia may provide new foreign deposits to Pakistan in the coming days and weeks.
Market observers will closely monitor developments related to the FY2023-24 budget. If the government presents a budget aligned with IMF recommendations, it would indicate that both sides have agreed to resume the loan programme, which has remained stalled since November 2022.
Despite his previous failure to reach an agreement with the IMF since returning to office in September 2022, Finance Minister Ishaq Dar has instructed his ministry to share budget documents with the IMF.
Rauf expressed hope that the IMF would sign the much-awaited staff-level agreement with Pakistan before the programme expires on June 30, 2023. He emphasised, “A further delay in restarting the programme may raise questions about the credibility of the IMF, as the government has already met several prerequisite conditions for the programme.”
Rauf also noted that the rupee may face pressure in June due to the repayment of foreign loans amounting to $3.7 billion, as Pakistan’s foreign exchange reserves are critically low at $4.2 billion at present.
Additionally, historical trends indicate that traders typically engage in higher imports in June, the last month of the fiscal year. This import pressure could further weaken the rupee in June.
A global news outlet previously reported that the fair value of the Pakistani rupee stands at Rs244/$ based on the real effective exchange rate (REER) matrix.
Published in The Express Tribune, May 31st, 2023.
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