Rupee snaps losing streak on IMF inflow hopes

KARACHI: The rupee advanced from a record low on Thursday as Pakistan inched closer to secure crucial financing from the International Monetary Fund (IMF) after Saudi Arabia assured the Washington-based lender that it would provide a $2 billion loan to help the country avert a default.

The local unit climbed to 284.42 per dollar at the close in the interbank market, after sliding to an unprecedented 287.85 on Wednesday, according to data from the State Bank of Pakistan (SBP). The currency appreciated by 1.21 percent or 3.43 rupees against the dollar.

In the open market, the rupee rose by 1.50 rupee versus the greenback. It was selling at 294.50 per dollar, compared with 295.50 in the previous session, according to the rates given by the Exchange Companies Association of Pakistan.

“News that Saudi Arabia will pay $2 billion to Pakistan that will help in getting IMF tranche provided support to PKR,” said Mohammad Sohail, CEO of Topline Securities.

Pakistan expects a similar commitment from the United Arab Emirates for a $1 billion deposit after receiving confirmation on deposits from Saudi Arabia. If the UAE provides the IMF with the same assurance, there are good chances that a staff-level agreement will be reached.

Securing financial pledges from friendly countries to bridge the external financing gap had been crucial for Pakistan, where foreign exchange reserves have shrunk to just one month's worth of imports and an agreement to release an IMF bailout tranche of $1.1 billion has not yet been reached.

Since the start of February, Islamabad and the IMF have been negotiating the release of $1.1 billion from a $6.5 billion bailout package that was agreed upon in 2019. To unlock funding from the IMF, the government has cut subsidies, removed an artificial cap on the exchange rate, increased taxes, and raised fuel prices. The consumer price index inflation soared to an all-time high of 35.4 percent in March as food and energy prices spiraled.

The State Bank of Pakistan raised its benchmark interest rate by 100 basis points to 21 percent.

The central bank stated in its latest monetary policy statement that while the current account deficit had significantly decreased due to falling imports, the balance of payments situation remained weak on low foreign exchange reserves. The SBP reserves have decreased to $4.2 billion.

Lower inflows from multilateral institutions and friendly nations as a result of the recent domestic economic turmoil and the unstable political environment have been further hampered by the strict monetary policy implemented by the world's major central banks. The SBP stressed the significance of finishing the IMF's 9th review in light of the current circumstances, as doing so will lessen market uncertainty and enable additional flows from bilateral and multilateral institutions.

The central bank expressed optimism that by June 2020, when the agreement with the IMF is finalised, foreign exchange reserves will surpass $10 billion.