Rupee gains 1.13 percent on IMF bailout bets

KARACHI: The rupee on Friday gained 1.13 percent against the dollar in the interbank market hoping the initiation of fuel subsidy reversal will open the spigots of IMF loan inflows worth $6 billion, analysts said.

The rupee ended at 199.76 to the dollar, compared with Thursday’s close of 202.01. The domestic currency recovered by 2.25 rupees after consecutive decline for 16 sessions.

In the open market, the local unit gained 2.50 rupees of its value. It was trading at 201 versus the greenback.

The government removed the fuel prices cap to secure the financing from the IMF after the both sides failed to reach a staff level agreement to conclude the seventh Extended Fund Facility (EFF) review.

The ruling coalition, which took office in April, is struggling to implement targets set by the lender agreed to in the bailout deal.

The former prime minister Imran Khan froze the petroleum prices to cool surging inflation. The new government had been unwilling to raise the fuel prices fearing its political cost.

As the government has met the prerequisite of the IMF programme, both sides are expected to reach a staff level agreement soon to pave the way for the disbursement of $900 million in funds.

“Getting back on the IMF programme will open access to much needed external financing, especially from multilateral institutions,” Mustafa Mustansir, the head of research at Taurus Securities Limited told The News.

“This will help reduce Pakistan's default risk. The same will also support the rupee,” he said.

However, Mustansir sees an increase in headline inflation as fuel and electricity subsidies are removed. Core inflation will also rise significantly.

“For now we anticipate inflation for May to rise to 14-15 percent level, followed by over 16-17 percent inflation during June assuming subsidies will be withdrawn further in the coming days,” Mustansir added.

“However, tough measures need to be taken if Pakistan is to avoid a ‘Sri Lanka' type situation,” he added.

Despite today's recovery, the rupee still faces pressure. It has fallen by 26.53 percent against the dollar so far this fiscal year.

The lack of foreign assistance and political instability has increased the risk premium (credit default swap) for the country. Yields on the country’s dollar-denominated bonds were over 20 percent. Foreign banks are becoming reluctant to offer trade credit for oil imports to Pakistani refineries and oil marketing companies.

The repayment of a $1 billion bond is maturing in July 2022 followed by another bond maturing worth $1 billion in December 2022.

The ongoing political turmoil worsened after Khan gave an ultimatum to the government that he would return in six days if no elections were called.

The country’s economy is under immense pressure as foreign exchange reserves are running low. As of May 20, Pakistan had $16.1 billion forex reserves, of which the State Bank of Pakistan held $10.1 billion, a less than two months of imports cover.

Fahad Rauf, the head of research at Ismail Iqbal Securities said the hike in the fuel prices was absolutely necessary, not just to revive IMF but to curtail demand in the economy in order to save precious dollar reserves.

“There will likely be more price hikes down the lane, which along with the budget announcement would lead to IMF revival and reduce default risk,” Rauf added.

According to latest estimates shared by the SBP, Pakistan’s gross financing needs for the fourth quarter of this fiscal year and FY2023 amount to $45 billion in total whereas, potential financing arrangements are about $51 billion. However, a large part of these arrangements are multilateral loans, mostly conditional to the restart of the IMF programme.

The country’s foreign currency reserves are depleting due to widening current account deficit and higher external debt repayments. The current account deficit widened sharply to $13.8 billion in 10 months of this fiscal year.

The major reason behind the widening deficit is increasing imports amid higher global commodity prices.