Rupee seen facing more punishment

KARACHI: Pakistan’s currency ended the second year of pandemic on a negative note as the country’s import-dependent economy remained under pressure from the deteriorated balance of payments position and the delayed International Monetary Fund $6 billion financial package since April.

The rupee is one of the worst performers in Asia, losing 10 percent against the dollar, its fifth consecutive year in the red. It fell from 159.83 on December 31, 2020, to close at 176.51 per dollar on December 31, 2021.

The widening current account deficit and dwindling foreign exchange reserves led to a much weaker currency. Pakistan is faced with a rapidly growing current account deficit, driven primarily by an increasing trade gap. This reflected the impact of higher imports caused by the post-pandemic rise in domestic demand amid fiscal stimulus, and a record surge in global commodity prices.

The local currency was stable in the first half of 2021 helped by the government’s efforts to control the second and third wave of the Covid-19, continued economic recovery, and the successful completion of the second to fifth IMF reviews.

However, from April and May, the import payment pressures became more visible and didn’t manage by the inflows from exports and remittances. The country has been hit hard by high-priced food, petroleum, and metal imports. Besides, the central bank’s Temporary Economic Refinance Facility (TERF) for expanding and modernising industry increased raw material and machinery imports. And, the Covid vaccine imports also put pressure on the trade balance.

As the State Bank of Pakistan, opted to let market forces decide the rupee’s movement as per the flexible exchange rate mechanism, the dollar demand led to currency depreciation.

The trade deficit surged to $20.6 billion in first five months of this fiscal year. Historically, the growth phases have been led to a large current account deficit as the country’s economy is dependent on imports for production and consumption.

The country posted a current account gap of $7.1 billion or 5.3 percent of its gross domestic product in July-November FY2022 versus the surplus of $1.9 billion a year ago.

Pakistan foreign exchange reserves, as of December 24, stand at $24.3 billion (including SBP reserves: $17.9 billion). The $3 billion deposits from Saudi Arabia in early December provided much-needed relief to the balance of payments, but the fast depleting forex reserves due to increased imports and external debt payments in the backdrop of stalled IMF funding sparks fear about the stability of the external current account. SBP’s forwards/swaps position in October 2021 was $4.8 billion.

Pakistan debt repayment for FY2022 stands at $14.3 billion (including China’s safe deposit of $4 billion), according to a report issued from Insight Securities.

Pakistan has to repay/reschedule a loan of $9.3 billion (few repayments already completed) this year, it added.

Some analysts expect the rupee to gain support in the near-term on the back of recent hike in interest rates, debt issues in international capital markets and receipt of 1 billion from the IMF in January 2022, which would also improve prospects of raising further foreign debt.

“The rupee is fundamentally undervalued, with REER around 95. IMF programme resumption would also provide some support, so I don't see a major depreciation in 2022,” said Fahad Rauf, the head of research at Ismail Iqbal Securities.

“However, global commodity prices movement would be critical in determining the fate of rupee as import bill needs to come down to a more sustainable level for rupee to attain stability.”

Analysts, however, anticipate the rupee-dollar parity to be determined primarily by the current account trajectory in the medium to long-term.

“Consequently, we expect the rupee to average at 169/USD for FY2022, closing at Rs182/USD,” said an analyst in a report issued by Taurus Securities.

An analyst from Tresmark doesn’t see any significant change in the rupee’s value till the bill for the IMF prior action is passed in the National Assembly (NA). The January 12, IMF board approval will lead to some consolidation for the rupee.

“Exporters are still cautious, and may increase the quantum of forward selling till IMF prior actions are completed, but in the 1-4 month tenors,” the analyst said in a client note.

Analysts expect both quantum and tenor of forward selling to increase substantially if IMF approval is granted.

“Coupled with importers delaying payments, and some central bank related intervention, the rupee could target the 172-175/$ level in a matter of days. With this said, markets are keenly watching the national assembly proceedings unfold,” Tresmark added.