The value of the local unit has risen recently due to the optimism sparked by the IMF review, which has boosted investors’ confidence in the economy
- The rupee rebounded 0.36% against the dollar last week.
- Local currency gains on dollar sales by exporters.
- “Market estimates will strengthen rupee to around 282.”
KARACHI: The rupee is expected to gain ground next week driven by dollar sales by exporters and optimism about the country’s economy following the IMF deal. News on Sunday, citing traders and analysts.
Last week, the local currency rebounded 0.36% against the dollar, breaking a 17-day losing streak in the interbank market and rising from 287.55 on Monday to 286.50 on Friday.
The value of the local unit rose recently due to the optimism sparked by the International Monetary Fund’s review and its positive response, which strengthened investors’ confidence in the economy, according to traders.
“We expect the rupee to continue to rise as market flows start to improve. Exporters are returning to the market to sell dollars in anticipation of the rupee appreciating further in the coming days. Improved supplies and positive expectations are supporting the rupee,” a currency trader said.
IMF staff and Pakistani authorities on Wednesday reached staff-level agreement on the first review under Pakistan’s Standby Arrangement (SBA), which is subject to approval by the Global Fund’s Executive Board. After approval, the country is scheduled to receive approximately $700 million, bringing the total disbursements under the credit standby agreement to approximately $1.9 billion.
“As soon as the staff-level agreement with the IMF was announced, the top machinery, including the interim prime minister, the interim finance minister, and the governor of the State Bank of Pakistan, came out with their guns blazing and spoke with all positives to further strengthen the staff-level agreement with the IMF,” she said. Tresmark, a financial technology company, said in a weekly note to clients on Saturday: “Sentiment.”
“The verbal intervention was accompanied by market tactics to bring down the local currency. Import payments were allegedly delayed, the issuance of new letters of credit was restricted, and oversight of market trading was intense.
The currency reversal brought exporters back into forward selling, despite forward premiums falling by 30% (one and three-month ended the week at 190 and 430 paise).
“The market now estimates that the rupee will rise to around US$282, at which point the State Bank of Pakistan will resume buying dollars. Positive news flows such as lending from multilateral institutions and IMF Executive Board approvals will keep the rupee buoyant,” Tresmark said.
The positive developments will help maintain the rupee’s upward trajectory in the coming days. The government hopes that the country’s foreign exchange reserves will increase after the installment of the imminent IMF loan to the country is repaid, which will also facilitate the rapid unlocking of financing from other multilateral partners with whom the government has already negotiated.
As of November 10, Pakistan has $12.5 billion in foreign exchange reserves, compared to $8.5 billion in May. Remittances and exports are improving. The current account deficit for October is expected to shrink to $100 million.
Pakistan is expected to receive financing worth approximately $1.2 billion from the World Bank, Asian Development Bank and Asian Infrastructure Investment Bank before the end of the year. The government also expects more inflows from Saudi Arabia and the UAE to support the country’s economy.
Over the past 20 days, global oil prices (Brent) have fallen by 17%, from $97 to $80 per barrel.
Yields on Treasury bills and bonds are trending lower. Given the base effect, tight monetary policy and the base effect, inflation is expected to decline significantly from January; Interest rates are positive on a forward-looking basis.
“But it is too early to claim success,” Tresmark said, adding that the geopolitical risks in the region are great, the US financial crisis poses a global threat, and there are great possibilities of a recession in Europe, the United Kingdom, China and large swaths of emerging economies. Markets where sovereign debt is trading at distressed levels, the conflict between Ukraine and Russia, and the saga of property and debt crises in China should keep markets on alert.
“The real disappointment remains the slow progress of reforms within the country, which include low productivity, low taxes on GDP, fiscal mismanagement, energy reforms, privatization of loss-making state-owned enterprises, etc.,” the report noted.
“No amount of verbal meddling and optics management will improve the country’s fiscal health. With less than three months until the next election, we can hear investors saying: Welcome to the real world.”