Political uncertainty pushes rupee to record low; stocks plunge

KARACHI: Stocks plunged 1.68 percent and the rupee marked a record closing low on Monday as renewed political uncertainty triggered by sweeping PTI victory in Punjab by-election sparked worries about the country’s economic outlook and follow through on IMF commitments.

With changes visible on the political front, shadows hover over whether the government would be able to meet its commitments agreed with the IMF to get the bailout programme back on track or not.

The Pakistan Stock Exchange’s (PSX) benchmark KSE 100-share Index shed 707.80 points to 41,367.11 points against 42,074.91 points recorded in the last session. Rupee traded as low as 201.6 in the interbank market, before recovering to close at 215.20 per dollar. It ended at 210.95 on Friday. The local unit lost 4.25 rupees or 1.97 percent against the greenback, suffering one of the biggest single-day falls.

The currency also depreciated by five rupees to hover at an all-time low of 216 in the kerb market. Rupee has been in consistent decline over fast depleting foreign exchange reserves on the back of surging current account deficit. Last week, the government secured a much-needed loan programme from the International Monetary Fund to avoid a Sri Lanka-like economic crisis in Pakistan, but the international investors’ confidence in the country’s economy is not restored. Strengthening of the US dollar globally also put pressure on the rupee.

“The market is pricing in an early election at a time when we are in financial distress, causing the rupee to collapse. This is amongst the highest single-day fall of the rupee,” said Komal Mansoor, the head of research at Tresmark.

PTI swept Punjab by-elections, winning 15 out of 20 seats that were vacated after the disqualification of PTI ministers who had voted in favour of PML-N’s Hamza Shahbaz. Alfalah CLSA Securities said in a note that the PTI-led coalition was now in a position to form the government in Punjab. More importantly, this could pave the way for early general elections. PML-N and PPP’s top political leaderships were contemplating their next move and formal announcements were expected.

The market was also skeptical about the status of the general elections in the country. It was looking at whether the elections would be held early or on their due date next year. Alfalah’s head of research Fahad Irfan suggested that instead of political point scoring, a national consensus on key economic issues was needed to calm international lenders and local businesses.

“Pakistan cannot afford chaos on the political front, note that the government has completed the IMF staff-level agreement, but it awaits IMF executive board approval. A regime change can delay this further, which in turn can take rupee to new lows, spike inflation, and, in the worst case, result in a default on foreign debt,” Irfan said.

The IMF agreement would pave the way for a disbursement of $1.17 billion. The board has also been considering adding $1 billion to a $6 billion loan programme. Punjab by-election results would increase the political noise and uncertainty in the country and also impact the economic decision-making of the ruling PML-N-led federal government as it might find it tough to make difficult economic decisions, said Topline Securities in a report.

“All eyes will be on the federal government on what decisions it takes especially regarding hike in electricity/gas prices as approval of next IMF tranche would be dependent upon such key measures agreed with the IMF,” it added.

The country requires $4 billion from friendly countries this month to bolster the forex reserves, according to the IMF. The government would also have to get external financing of $30-35 billion this fiscal year to bridge this funding gap amid a higher trade deficit and increasing foreign debt repayments.