Rupee slumps to new record low

Pakistani currency maintained its downturn for the seventh successive working day, as it nosedived to a new all-time low at over Rs194 against the US dollar in the interbank market on Monday. The government kept delaying required measures to control the growing economic crisis. The rupee fell 0.85% (or Rs1.65) to Rs194.18 against the greenback as compared to Rs192.53 at the close of previous working day (Friday), according to the central bank.

Cumulatively, in the past seven working days, the rupee has sunk 4.57% (or Rs8.49). Besides, the inaction on the part of the government on the economic front pushed the yields of government bonds (three to 12-month T-bills) to a 24-year high at over 15% in the secondary market. “A persistent delay in the receipt of next tranche of $1 billion from the IMF (International Monetary Fund) is mounting pressure on the rupee,” Exchange Companies Association of Pakistan (ECAP) Chairman Malik Bostan said in an online meeting with Prime Minister Shehbaz Sharif.

The IMF’s multibillion-dollar loan programme has been on hold for the past 11 months. The lending institution has conditioned the revival of the programme on the withdrawal of subsidies on petroleum products and electricity and increase in tax rates in the next fiscal year’s budget. Finance Minister Miftah Ismail announced on Sunday that the PML-N coalition government has decided not to increase energy prices for the time being, as the measure would spark high inflation in the country.

The minister said that they would try to convince the IMF to drop its condition of reversal of energy prices. The country’s economic team is scheduled to hold the second round of talks with the global lending institution in Doha on Wednesday (May 18). “Pakistan has to resume the IMF loan programme at any cost. There is no other option left in the short run to overcome the economic crisis,” said Pak-Kuwait Investment Company Head of Research Samiullah Tariq.

While talking to PM Sharif, Bostan underlined that the rupee has continued to sink amid the widening trade deficit. The trade deficit has surged 65% to the historic high at $39.2 billion in the first 10 months (Jul-Apr) of current fiscal year 2021-22 as compared to the same period of previous year. Besides, the government is due to repay foreign debt worth $12 billion over the next one year. On the contrary, the country’s foreign exchange reserves have dropped to a critical low level at $10.3 billion in the week ended May 6, 2022.

Apart from acquiring the IMF loan, he suggested that the government should cut the import bill by $1 billion a month through banning imports of luxury goods like high-end cars. “The savings will enable the government to repay foreign debt for the next one year and help it avoid taking excessive new foreign loans to overcome the balance of payments crisis in the short to long run.” The cut in foreign expenditures and new loans would help the rupee to partially recover against the greenback, he said.

The elevated import bill of $6.25 billion a month (and foreign debt repayment) against the cumulative inflows of $6.10 billion on account of export earnings and workers’ remittances have worsened the balance of payments crisis. The foreign exchange reserves have declined by around a net $7 billion in the past five months (in the current calendar year to date). “The currency is depreciating due to the government’s reluctance to increase energy prices, as the IMF loan programme is linked with the condition,” Tariq added.

The second option with the government to strengthen the rupee is to announce the election date. “The rupee needs a way forward to (partially) recover against the dollar including securing the IMF programme or announcing the next general elections,” he said. Bond yields The yields on T-bills continued to grow due to the government’s heavy reliance on domestic borrowing to finance the fiscal deficit, he said. The deficit is increasing by over Rs100 billion a month due to the payment of subsidies on petroleum products and electricity.

The high demand for domestic debt from commercial banks pushed yields on T-bills to a 24-year high in the secondary market. Pakistan is estimated to record a significantly high fiscal deficit of around Rs3 trillion in the last quarter (Apr-Jun) of current fiscal year 2021-22, Tariq said. The deficit came in at Rs2.56 trillion in the first nine months of FY22, he recalled. “The yield may maintain its uptrend ahead of the next auction of T-bills in the primary market later this week,” he said. “The reversal in subsidies on energy products may help bring the yields down.