IMF uncertainty: Rupee hits record low as gold soars

KARACHI: The rupee reeled to an all-time low against the dollar on Tuesday, which sent the gold racing to a record high, mounting pressure on the government to revive a stalled IMF loan programme, analysts and traders said.

The rupee ended at 188.66 to the dollar, compared with Monday’s close of 187.53. It depreciated by 1.13 rupees or 0.60 percent. The currency hit its previous record closing low of 188.18 on April 7.

The gold rates in the local market jumped Rs1,400 to Rs134,400 per tola on Tuesday, which the jewelers pinned on rupee depreciation amid ongoing rush for safe-haven investments. “Owing to rupee depreciation, gold is becoming even more expensive and as a result the demand is squeezing,” said a gold dealer.

In the open market, the rupee dipped to 190 per dollar. It finished at 189 in the previous session, according to rates quoted by the Exchange Companies Association of Pakistan. “The uncertainty with respect to the IMF programme, coupled with absence of direction from the government regarding major economic policies and roadmap ahead, is increasing pressure on the [rupee/dollar] parity,” said Tahir Abbas, the head of research at Arif Habib Limited.

Prime Minister Shehbaz Sharif, who took office last month after ousting the former premier Imran Khan, faces the Herculean task to get the IMF bailout going as it’s a prerequisite for further financial assistance from the other bilateral and multilateral creditors.

The country needs quick foreign currency inflows to meet import and debt payments amid falling foreign exchange reserves. However, the present government will have to cut costly energy subsidies, which were introduced by the former government. It requires increasing petroleum and electricity prices to get the nod from the IMF for the release of the next loan tranche.

Shehbaz Sharif visited Saudi Arabia and the United Arab Emirates last week but couldn’t manage to get any pledges of immediate financing. Rollover of $2.3 billion Chinese commercial loans has also not been materialised yet.

Pakistan and the Fund are likely to start policy level discussions on May 18 in Doha. The success of talks depends on withdrawing fuel subsidies.

Higher trade and current account deficits and capital outflows have led to a sharp weakness in value of the rupee against dollar. This, along with debt repayments, has put pressure on forex reserves with the State Bank of Pakistan, which dropped by $5.8 billion between end-February and April 30, 2022, to $10.5 billion, equivalent to less than two months of imports.

“Basically, there are hefty import payments, especially for oil and energy, which are increasing the demand for dollars. There are fears that import bills will bloat further in the coming months, while forex depletes at a fast pace,” said Malik Bostan, the chairman of the Exchange Companies Association of Pakistan.

“Hot money inflows from foreign investors also saw slowdown even as investors are not buying local currency bonds and treasury bills owing to rising political temperature in the country and the external sector challenges the economy is facing,” Bostan added.

“The government should remove subsidies on fuel prices and take steps to control unnecessary imports so the trade deficit could be managed,” he suggested.

The country's trade deficit jumped 65 percent to $39.3 billion in 10 months of this fiscal year fueled by higher imports. In April, the trade gap rose 24 percent year-on-year to $3.74 billion.

Total imports increased 46.4 percent to $65.5 billion in July-April FY2022, while exports rose 25.5 percent to $26.2 billion.

Investors are also concerned over how the upcoming central bank governor will handle economic challenges. Dr Murtaza Syed, the senior most deputy governor has assumed the charge of acting governor SBP.

Under the new SBP Act, the acting governor can serve in this capacity for a maximum of one month, whereas previously it was for a maximum three months, said Yaseen Anwar, the former governor SBP.

“Thus, the governor's appointment must be made within 30 days,” Anwar added. “We have serious economic fault lines on both twin deficits that must be addressed as soon as possible, particularly the current account. Otherwise, we could be in a dire situation,” he warned.

Analysts said the recent significant depreciation might reflect concerns on the macro fundamentals and exert greater pressure on Pakistan’s external instability, according to a report from Arif Habib Limited on external account outlook released on April 29. However, with the deferment of repayment by the G-20 countries, disbursement of IMF’s tranche after successful seventh review, potential inflows against bilateral/multilateral arrangements and rollover of existing Chinese external debts, the pressure on the foreign reserves are likely to be put off, it said.

Currently, the SBP seems to be under pressure and requires buildup of forex reserves to provide the much-needed cushion to ensure import cover remains above three months at least. Moreover, USD is being boosted by safe-haven demand, high inflation and a hawkish Federal Reserve.

“If these tailwinds continue to lift the greenback in FY22-23, the dollar index will continue marching north weakening the rupee further …,” the report said.