Dollar demand likely to keep rupee under pressure

KARACHI: The rupee is expected to weaken against the dollar in the coming week on an increased demand for the US currency for imports and other payments.

During the outgoing week, the local unit continued to follow a range-bound trading pattern in the interbank market, ending the week at 286.93 per dollar on Friday and 286.19 on Monday. It fell by 0.25 percent against the dollar.

“June, though, has traditionally been a heavy outflow month due to defense related payments and this will give some volatility in rupee rates which may go up as 290/$ in the coming weeks,” said Tresmark in a weekly note.

“Considering the latest trade deficit of $2.1 billion, we have now revised the projected current account to $470 million deficit,” it added.

The note further highlighted that the open market rates might remain distorted till there was some positive news on the IMF front or a steady stream of inflows, especially as importers (other than select industries) are asked to settle their imports by any means other than banking channels (thus giving rise to more grey market/hawala volumes).

The government presented is budget for the next fiscal year on Friday. In the realm of deficit financing, the government finds itself at a crossroads, where borrowing becomes the focal point. With a greater emphasis on domestic sources, the center aims to raise the necessary funds to bridge the funding gap.

The government has allocated 66

percent of total expenditure for debt servicing under domestic borrowing during

FY2024 which comes out to be around Rs5 trillion.

Financing the deficit via domestic sources remains skewed towards banking channels, around 62 percent. Moreover, the government is expecting to raise Rs2.5 trillion ($8.6 billion) external financing with majority inflows from commercial and Eurobonds, according to a report issued by Arif Habib Limited.

“However, we believe, the task of securing external debt in the current economic climate will be a formidable challenge.

Realistically speaking, expecting external borrowing of this magnitude appears to be a far-fetched notion considering the imminent end of on-going IMF programme in June,” it said.

The prospect of negotiations for a new IMF programme becomes increasingly imminent, as also emphasised by the finance minister.

Dar also hinted towards the likelihood of reprofiling of external debt which would provide immediate relief to the country's financial burden by spreading out repayment obligations over an extended period, the report noted.