Rupee strength tied to restoration of IMF’s loan program

KARACHI: Rupee’s fate would continue to hang in the balance until Pakistan gets back to IMF’s loan program that was deferred in March amid the coronavirus tumult and the country’s foreign loans are re-profiled, analysts said on Saturday.

The analysts said the ‘mysterious’ debt repayments of huge $1.7 billion last week exerted pressure on the rupee that traded briefly at 166 versus US dollar to close at 163.3.

Informed sources said the central bank scooped dollars from the market for repayment to a Chinese bank. Last fiscal year, Chinese commercial banks cumulatively injected $2.9 billion to shore up Pakistan’s foreign exchange reserves that fell below $10 billion.

Though the rupee is expected to trade in the 160-162 range next week, “the quickest lifeline is multilateral inflows and re-profiling of foreign loans beyond a one year horizon. Putting the IMF program back on track is an absolute must,” Tresmark, an application that tracks financial markets, said in a report.

“Data coming in is disturbing as SBP’s (State Bank of Pakistan) swap positions (a buy now sell forward transaction) witnessed a huge increase of $2.5 billion in the last 2 months and still reserves have continued to decline,” it said. “Declining reserves have historically put pressure on the rupee. Exports have increased month-on-month, but may not complement the loss in remittances, while issuance of fresh (foreign denominated) bonds may run in to difficulties due to dismal market conditions.”

Last week, the central bank saw a biggest weekly drop of $1.7 billion at least in a decade. Foreign exchange reserves held by the State Bank of Pakistan (SBP) fell to $10.36 billion in the week that ended May 29.

However, the central bank exuded confidence over the external account’s stability. Earlier this week, SBP Governor Reza Baqir told analysts that rupee emerged as the least affected currency among the comparable developing economies in the face of coronavirus crisis. Rupee experienced a 3.3 percent slide against the US dollar between January 20 and May 4, he said.

A currency dealer at a bank agreed that rupee is expected to appreciate further in the coming days “as there will be no large import and debt payments pressure on the domestic currency”.

“Moreover, the expectation of foreign inflows from the multilateral lenders is expected to lift the market sentiment,” the dealer said on condition of anonymity.

In late March, IMF paused discussions with Pakistan on the second review of the three-year extended fund facility program of $6 billion following the coronavirus outbreak. That review’s conclusion is imperative for the country to bag the third tranche of around $450 million under the facility.

Though the IMF said the talks with Pakistan continue, the lender didn’t prefer to slate timeline for the conclusion of the review.

Even after one month of an understanding to avail the one-year debt payment moratorium announced by the G20 grouping under COVID-19 support to poor economies, no agreement has been signed to freeze an estimated $1.8 billion of Pakistan’s loan repayments.