Rupee extends gains, scales near 2-week highs

KARACHI: Rupee extended gains on Tuesday, scaling near two-week highs on expectations that Pakistan’s incoming finance minister Ishaq Dar would help the nation out of its economic rut and strengthen the local currency.

Gaining 1.33 percent, the rupee closed at 233.91 per dollar, its highest since September 14, and above its 237.02 close on Monday.

The local unit rose 3.50 rupees or 1.47 percent versus the greenback in the open market. It ended at 234 to the dollar, compared with 237.50 in the previous session.

Dealers said the reports that Ishaq Dar, a close aide of PML-N supreme leader, Nawaz Sharif, is returning to Pakistan to take charge as the finance minister, helped improve sentiment on the rupee. Besides, the fall in international commodity prices boosted the rupee’s rise.

“The rupee’s rallies continued as exporters started bringing dollars to the market with the speculators seeming to be sidelined at this point,” said a foreign exchange dealer.

“The market is excited about the appointment of Ishaq Dar, a staunch supporter of stronger rupee and low-interest rates, as new finance minister of Pakistan,” he added.

Alfalah CLSA Securities said in a note that a change in command seems very well timed by Dar since the exchange rate was anticipated to regain losses over the coming months as foreign debt repayments would likely get deferred (excluding bonds) and commitments could be expedited in lieu of recent floods.

Moreover, the current account deficit was likely to remain in check on account of declining international commodity prices and administrative measures taken by the government. Inflation too has most likely peaked and was expected to come down over the coming months.

Prime Minister Shahbaz Sharif and former finance minister Miftah Ismail have succeeded in negotiating three concessions from the IMF in their recent meeting with the Fund. Those three concessions include the upcoming $1.1 billion tranche (likely to be front-loaded), a three-month freeze on taxes on petroleum and fuel cost adjustments on electricity tariffs, as well as relaxation on current account and fiscal deficit targets to import food supplies and manage flood-related expenditures.

Alfalah’s head of research Fahad Irfan said Dar would not have the kind of free hand he had in his previous term.

“The IMF in general has been much stricter in terms of policy implementation. Most importantly Pakistan now has a free exchange rate regime, even otherwise, the country has record low forex reserves with no room to burn them to control the exchange rate. However, administrative curbs and stronger checks on manipulation and the smuggling of the dollars out of Pakistan are still possible,” Irfan added.

He said the rupee was expected to regain some lost ground. However, with the fear of Dar, the pace of appreciation has accelerated.

He noted that changes in key positions, at times of catastrophic floods and an extremely fragile economic environment (when continuity/consistency is needed the most), might help PML-N/Dar regain some lost popularity; however, this might slowdown policymaking.

Dar maintained the rupee at a parity of 100 per dollar for his entire term (2013-2017) and kept the policy rate at its historic low of 5.75 percent from May 2016 to December 2017.

This lethal combo was the main reason why Pakistan posted a historic high current account deficit of $19.2 billion or 6.3 percent of the gross domestic product in FY2018 and eroded foreign exchange reserves to just 2 months of import cover, according to Irfan.