Rupee posts comeback after IMF unveils May plans

KARACHI: Rupee gained 0.38 percent against dollar in the interbank market on Monday following the International Monetary Fund agreement to increase the size and duration of $6 billion loan programme, dealers said.

In Monday trading, it closed at 186.05 per dollar compared with the previous close of 186.75 in the interbank market. In the open market, the currency went up 50 paisa to settle at 187 versus the greenback.

“The IMF statement, saying the Fund mission will visit Pakistan in May to resume discussions over policies for completing seventh review may have helped sentiment, as did the news of extending the stalled programme by up to one year and increasing the loan size to $8 billion,” said a currency dealer.

Traders and markets were looking at the IMF as progress with the Fund instils investor confidence in the economy, stabilises Pakistan’s foreign exchange reserves, and unlocks funding from other international financial institutions.

Besides, IMF programme revival, expected $2.4 billion rollover from China and other foreign inflows would provide much needed support to the balance of payments and the currency as well.

The IMF, in its latest statement, said the Fund and Finance Minister, Miftah Ismael have agreed that prompt action was needed to reverse the unfunded subsidies which have slowed discussions for the seventh review.

These measures mainly include the subsidies being given to freeze power tariffs and retail fuel prices. A roll back of which would result in Rs21-50 per litre increases in petrol and diesel prices, according to analysts.

Moreover, the IMF wants Pakistan to minimise deviation from the Rs25 billion surplus primary target agreed with the IMF. Pakistan has requested a one-year extension in the IMF’s Extended Fund Facility until June 2023.

In February, former Prime Minister Imran Khan announced freezing of electricity tariffs and retail fuel prices till the next budget against Pakistan’s commitment with the IMF to maintain fiscal tightening.

These measures stalled the IMF programme, halted foreign debt roll over, caused rapid foreign exchange reserves drawdown and weakened the rupee to record low of 189, said an analyst at Alfalah Securities in a report.

“Our preliminary understanding is that these measures will spike CPI (consumer price index) inflation to 14-15 percent, making a case for 100bps (basis points) hike in interest rates (especially since current account deficit is likely to stay at unsustainable levels),” he added.

Normalisation in the current account deficit could also be a positive development for the currency. The deficit is expected to average $1.5 billion in coming months due to continued upward trend in the workers’ remittances. The rupee had been under pressure on the back of falling forex reserves amid higher import payments, especially oil and liquefied natural gas, and external debt repayments.