Rupee seen facing more punishment

KARACHI (Reuters) – Pakistan’s currency ended the second year of the pandemic on a negative note as the country’s economy, dependent on imports, remained under pressure from the deteriorating balance of payments position and the delay $ 6 billion from the International Monetary Fund since April.

The rupee is one of the worst performers in Asia, losing 10% against the dollar, its fifth consecutive year in the red. It went from 159.83 as of December 31, 2020 to 176.51 per dollar as of December 31, 2021.

The widening current account deficit and the decrease in foreign exchange reserves led to a much weaker currency. Pakistan faces a rapidly growing current account deficit, mainly due to a growing trade deficit. This reflected the impact of the surge in imports caused by the post-pandemic surge in domestic demand as part of fiscal stimulus and a record spike in global commodity prices.

The local currency remained stable in the first half of 2021, aided by government efforts to control the second and third waves of Covid-19, the continued economic recovery, and the successful completion of the second to fifth IMF reviews.

However, from April and May, the pressures on import payments became more visible and were not managed by inflows of exports and remittances. The country has been hit hard by high import prices for food, petroleum and metals. In addition, the central bank’s Temporary Economic Refinancing Facility (TERF) for industry expansion and modernization has increased imports of raw materials and machinery. And, imports of Covid vaccines have also put pressure on the trade balance.

As the State Bank of Pakistan chose to let market forces decide the movement of the rupee in accordance with the flexible exchange rate mechanism, the demand for dollars caused the currency to depreciate.

The trade deficit jumped to $ 20.6 billion in the first five months of this fiscal year. Historically, phases of growth have led to a large current account deficit as the country’s economy depends on imports for production and consumption.

The country posted a current account deficit of $ 7.1 billion or 5.3% of its gross domestic product in July-November 2022 against the surplus of $ 1.9 billion a year ago.

Pakistan’s foreign exchange reserves, as of December 24, stood at $ 24.3 billion (including SBP reserves: $ 17.9 billion). Saudi Arabia’s $ 3 billion deposits in early December provided much needed balance of payments relief, but the rapid depletion of foreign exchange reserves due to increased imports and external debt payments against a backdrop of a freeze on IMF funding raises fears about the stability of the external economy. current account. SBP’s futures / swaps position in October 2021 was $ 4.8 billion.

Pakistan’s debt repayment for fiscal 2022 stands at $ 14.3 billion (including China’s secure deposit of $ 4 billion), according to a report released by Insight Securities.

Pakistan is due to repay / reschedule a $ 9.3 billion loan (some repayments already made) this year, he added.

Some analysts expect the rupee to gain near-term support thanks to the recent interest rate hike, debt issuances in international capital markets and the $ 1 billion IMF reception in January 2022, which would also improve the prospects for mobilizing additional foreign funds. debt.

“The rupee is fundamentally undervalued, with a REER of around 95. The resumption of the IMF program would also provide some support, so I don’t see any major depreciation in 2022,” said Fahad Rauf, head of research. at Ismail Iqbal Securities.

“However, the global movement of commodity prices would be critical in determining the fate of the rupee, as the import bill must fall to a more sustainable level for the rupee to achieve stability.”

Analysts predict, however, that the rupee-dollar parity will be primarily determined by the path of the current account over the medium to long term.

“Therefore, we expect the rupee to reach an average of 169 / USD for fiscal 2022, closing at Rs182 / USD,” said an analyst in a report released by Taurus Securities.

A Tresmark analyst sees no significant change in the value of the rupee until the IMF Prior Action Bill is passed in the National Assembly (NA). The approval of the IMF board on January 12 will lead to some consolidation of the rupee.

“Exporters are still cautious and may increase the amount of forward sales until prior IMF actions are completed, but within 1-4 month timelines,” the analyst said in a client note.

Analysts expect the amount and duration of forward sales to increase significantly if IMF approval is granted.

“Coupled with late payments from importers and some central bank intervention, the rupee could aim for the 172-175 / $ level within days. That said, the markets are closely monitoring the progress of the proceedings of the National Assembly, ”added Tresmark.