Rupee expected to stabilise next week

KARACHI: The rupee is seen stable in the coming week on the back of expected dollar inflows from international lending institutions to support Pakistan’s relief and reconstruction efforts in the wake of the catastrophic floods that have hit the country, dealers said.

The rupee came close to reaching a record low of 240 against the dollar but was unable to do so. It depreciated by 0.73 percent to 239.65 against the dollar in the interbank market this week.

“The anticipated bilateral and multilateral flows following the flooding are also probably going to lessen the strain on foreign exchange reserves and stabilise the rupee. We anticipate that the rupee would either hold steady at its current levels or experience some consolidation in the days ahead,” said a currency dealer.

The World Bank plans to provide flood-related support of up to $ 1.7 billion through existing and new projects. Besides, the reports of seeking debt relief from bilateral creditors in the wake of devastating flooding and the relaxation in the IMF conditions will help improve sentiments on the rupee, according to the dealer.

Recently, Pakistan got into the IMF programme. Additionally, it was successful in squeezing the current account deficit down to a few million. And it made significant cuts to the issuance of fresh import letters of credit.

Also, weekly inflation has decreased. Up to $2.6 billion in aid may be given to Pakistan in the current fiscal year. Although the rate of depreciation has moderated due to these developments, the rupee will still have some difficulties due to a few other causes.

“Even though Rupee is trading around 240/$, JP Morgan estimates REER [real effective exchange rate] to be around 97 level. On previous occasions we have seen SBP [State Bank of Pakistan] more comfortable towards the 92-95 level,” said Tresmark in a client note.

“This could imply some gradual depreciation towards the 247/$ level. Another factor is gradual adjustment of outstanding import documents. While these are stated to be those under the $50k limit, the numbers add up with some estimates that the back log is of around $1.2billion. This will put pressure on forex liquidity,” it added.

The dollar strength haunts economies. Since mid-last year, it has gained more than 20 percent, and according to analysts, every time this has happened in the past it has resulted in a serious global crisis. Of course the idea of such steep rate hikes is to kill demand, increase unemployment and encourage savings. Most analysts are now factoring in a global recession and even flagging rate cuts in 2023.

This whole episode of economic winter will not fly by Pakistan and its impact will need to be managed by slowing down the economy immediately with import compression, it said.

Emerging economies are particularly vulnerable to the most significant tightening of global monetary and fiscal policy for over five decades, with food security being a dire scenario. Pakistan will have to sufficiently fund as soon as possible because liquidity will dry up in the coming three months or so, it added.

“While the SBP is using subtle interventions to tame the market, it's time to be more vocal and assertive with creditors and lenders. While the IMF may be more comfortable in REER under 95, there is every reason Pakistan should promote a stable to slightly stronger Rupee with temporary outruns being acceptable to all stakeholders,” Tresmark noted.