KARACHI: The rupee is expected to remain under pressure next week due to rising political uncertainty and lack of an economic roadmap by the Prime Minister Shehbaz Sharif government, traders said.
The rupee closed at historic low of 200.14 to the dollar on Friday. The local unit lost 5.96 rupees or 3 percent against the dollar during the outgoing week.
Most traders see sustained pressure on the rupee next week on the government’s reluctance to eliminate energy subsidies.
“The market is skeptical about whether the government will successfully complete the negotiations with the International Monetary Fund to revive a $6 billion loan programme. The government hasn’t announced removal of fuel and power subsidies,” said a foreign exchange trader.
The political uncertainty heightened after the former prime minister Imran Khan announced to give a date for protest march soon.
“If Khan starts a long march towards Islamabad, it will teeter the country into chaos,” the dealer said. “This would further erode investor confidence in the country’s economy and currency.”
The State Bank of Pakistan is scheduled to announce a key monetary policy decision on Monday. Investors are waiting for the central bank’s interest rate decision to have clues about the future direction of the rupee.
Most analysts expect the SBP to raise policy rate further by 100 basis points to 13.25 percent at its upcoming monetary policy review.
The government also resumed negotiations with the IMF to secure around $1 billion loan tranche from the multilateral lender to aid its battered economy. The country is in a dire need of fast external financing amid depletion in the foreign exchange reserves. The forex reserves of the central bank declined to 10.2 billion during the week ending May 13 that can cover less than two months of imports.
The sliding rupee has caused alarm in Pakistan, which is already facing a higher trade deficit and rampant domestic and foreign borrowings. The country is struggling with soaring inflation and increasing costs for fuel and power, which are both greatly influenced by the dollar exchange rate.
The new coalition government has imposed a ban on import of luxury and non-essential items. This decision is taken in the light of recent dollar slippage, rising current account deficit and decline in country’s foreign exchange reserves.
The government said these measures would have a positive impact on the current account deficit and will help in controlling slippage of the rupee against the dollar.
However, analysts believe that these measures are insufficient and might lead to further increase in smuggling via western borders.
“As per government, these measures will save $6 billion on an annualized basis. However, problems on the smuggling front will further increase and adequate government measures are needed to curb these imports which are generally channeled through illegal ways, i.e. hawala hundi,” said an analyst at Insight Securities in a report.
These steps are directionally right but the government has chosen the easiest way to tackle pressure on FX reserves, it added.
“We believe this measure is a temporary patch and much needed reforms are required, as the government has to take tough decisions such as reversal in petroleum/electricity subsidies to bring the IMF on board which is necessary to support the country's external financing needs.”
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