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Thursday March 28, 2024

Rupee rises from record low on IMF deal optimism

By Erum Zaidi
March 04, 2023

KARACHI: Rupee advanced from a record low on Friday as the central bank’s larger-than-expected interest rate increase sparked optimism that the cash-strapped nation would soon reach an agreement with the International Monetary Fund to unlock a bailout.

The local unit strengthened 2.38 percent or 6.63 rupees to 278.46 against the dollar in the interbank market, according to the data from the State Bank of Pakistan.

The SBP surprised the markets on Thursday by increasing its benchmark policy rate by 300 basis (bps) points to 20 percent in an attempt to cool rampant inflation. In January, the consumer price index inflation jumped to 31.5 percent year-on-year, the highest annual rate in almost 50 years. Most analysts anticipated that the SBP would increase the policy rate by 200 percentage points.

Markets, however, viewed the aggressive rate hike by the central bank as the fulfillment of a condition of the IMF deal.

“Higher than expected rise in interest rate provided some support to PKR. People expect that after the rate hike IMF staff agreement may be done soon,” said Mohammad Sohail, CEO of Topline Securities.

Finance Minister Ishaq Dar’s assertion that negotiations with the IMF were set to come to a close could have also contributed to the rupee’s surge.

“We expect to sign staff level agreement with IMF by next week. All economic indicators are slowly moving in the right direction,” Dar said on his official Twitter handle on Thursday.

Dar claimed that harmful allegations that Pakistan would default were being disseminated by anti-Pakistan elements. “Not only is this wholly incorrect, but it also contradicts the evidence,” he added.

Despite paying all external due payments on time, the SBP's foreign exchange reserves have been increasing and are now approximately $1 billion higher than they were four weeks ago. International commercial banks have begun providing Pakistan with facilities.

In the open market, the currency increased by 5.50 rupees to close at 282.50 against the dollar.

According to Zafar Paracha, the secretary general of the Exchange Companies Association of Pakistan, the rupee’s rebound was expected. The currency rose 5 rupees to trade at 320 per dollar after giving up losses on the black market. The rupee was trading at 325 in Peshawar versus the dollar and at 330 in Kabul, Paracha said.

He said that the rupee reached an all-time low in the previous session after the government complied with the IMF’s demand to peg the currency to the rate at the Afghan border.

However, the State Bank of Pakistan stated during its briefing for monetary policy analysts that the reports related to the linking of the exchange rate with the border rate were purely speculative. The SBP has not received any instructions regarding this, and it was not an IMF demand. The discussions have been to reduce the gap between the interbank and the open market.

A shift to a market-based exchange rate is one of the requirements to be met by the government to complete the IMF’s 9th review.

If no negative trigger hits the market, Zafar expects the rupee’s rally will continue.

The market will be tested by the news that Pakistan will get $1.3 billion in funding from the Industrial and Commercial Bank of China Ltd in the coming days to help strengthen the country’s foreign exchange reserves, according to analysts.

Three prerequisites have been reached by the government; however, Pakistan has not yet fulfilled other criteria set forth by the IMF, such as making bilateral and multilateral external financing commitments.

Obtaining assurance that friendly nations will finance $5 billion to $7 billion is a difficult task for the government. Only one nation, longtime friend China, has provided $700 million in commercial loans to Pakistan.

SBP Governor Jameel Ahmad at a post-monetary policy analysts briefing said out of the $23 billion debt repayment, $15.8 billion has already been settled through rollover and repayment. Out of the remaining $7.2 billion, the SBP is hopeful that a rollover of around $4.3 billion will be done and the actual repayment would be around $2.9 billion for which financing would need to be arranged, the governor said.