Pakistani currency remained highly volatile for the third consecutive working day, as it slumped 1.30% (or Rs2.93) to a new all-time low at Rs224.92 against the US dollar in the inter-bank market on Wednesday.
“The rupee has continued to slide amid Pakistan’s growing default-like situation in case of international payments (import payments and debt repayments),” Ismail Iqbal Securities Head of Research Fahad Rauf said while talking to The Express Tribune.
The default-like situation is worsening due to an elevated demand for dollar. On the other hand, its supply has continued to shrink as inflows on account of export earnings and workers’ remittances have slowed down in recent weeks and months.
Consequently, the country’s foreign exchange reserves have depleted to critically low levels at $9.72 billion, covering less than six weeks of import.
The grim situation can be gauged from the fact that oil and gas importing and marketing companies have made import payments at a rate of over Rs240 per dollar in the past three days (Monday-Wednesday).
Yields on Pakistan’s international bonds have spiked to 50% and above, Rauf said.
Fitch Ratings downgraded Pakistan’s credit rating outlook to negative from stable on Tuesday. Earlier, Moody’s Investors Service did the same.
The currency has cumulatively lost 6.62% (or Rs13.96) in the past three days to Rs224.92 compared to Friday’s close at Rs210.95.
It devalued 30% to around Rs205 against the greenback in the previous fiscal year ended June 30, 2022.
“The rupee may remain volatile over the next one month till the International Monetary Fund (IMF) formally revives its loan programme and releases the next loan tranche for Pakistan,” Rauf said.
The IMF executive board, which would consider giving its final approval, is not scheduled to meet over the next four weeks. Other multilateral and bilateral lenders and friendly countries have linked the award of fresh bailout packages to Pakistan with the resumption of IMF loan programme.
Latest development suggests the IMF has sought Saudi Arabia’s guarantee that the kingdom will lend $4 billion to Pakistan to help it overcome the shortfall in the foreign financing requirement totalling $41 billion in the current fiscal year 2022-23.
The issuance of the guarantee by the kingdom is a must for the IMF to revive its loan programme.
The next one-month period is very crucial for Pakistan. The rupee may fall to any extent over the one-month period. In any case, however, “Pakistan will not default. IMF, which has the mandate to help its member countries to avoid default, would consider making alternative arrangements if Saudi Arabia makes excuses in filling the funding gap,” Rauf said.
Importers continued to make panic buying of dollars due to payment pressure, as global lenders and friendly countries have stopped making fresh financing awaiting the revival of IMF loan programme over the past seven to eight months. Pakistan only saw the rollover of Chinese commercial loan worth $2.3 billion a few weeks ago.
The domestic currency has weakened. It has become undervalued since it is not being traded against the US dollar on economic fundamentals. No economic rational is working to help the rupee avoid pressure at present. “It is very difficult to find fair value of the rupee at present,” he said.
The rupee may partially recover against the greenback when oil import payment pressure is overcome in a day or two. The currency may again become volatile when import payment pressure emerges in the coming weeks till foreign financing is revived, he said.
Published in The Express Tribune, July 21st, 2022.
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