The money market didn’t take Shaukat Tarin’s assurance about the IMF (International Monetary Fund) programme this time - the rupee rose 1.38 points (0.78 percent) over Monday and Tuesday - quite like it took the news of the Saudi loan, which pushed the rupee up for eight straight trading days (Oct27-Nov5), from 175.52 to 169.6 (3.25 percent). Dollar bulls were back in the market on Wednesday, squeezing another 0.79 percent out of the rupee as the government and opposition locked horns in the joint session of parliament.
And whether or not Shaukat Tarin risks becoming the finance advisor who cried “deal” one too many times is a debate for another time, since his guarantees about the EFF (Extended Fund Facility) invariably turn out to be more conjecture than fact, the fact remains that the rupee is poised for its next two big jumps when one, the Saudis actually send the money they promised and two, the extra fiscal space and the additional legislation demanded by the Fund make it greenlight the next tranche.
No doubt such developments will bid up the local currency, yet they will do nothing to address the fundamental reasons behind the rupee’s weakness, and they also make the simplistic assumption that the rupee and dollar trade in isolation. It’s not yet dawned on the local market, for some reason, that the dollar is also the global reserve currency and has a life away from the rupee as well. And in that life developments in the US and global financial markets are once again bolstering its position as King Dollar of Planet Forex.
The dollar index (DXY), which measures the greenback’s value against six most actively traded currencies, has shot up to levels not seen since July 2020 on the back of better-than-expected US retail sales numbers (up 1.7 percent against expectations of 1.4 percent) and highest inflation since 1990. That sent bond yields soaring, quite naturally, with 10-year Treasury yield rushing to 1.65 percent and 30 years to 2.04 percent and prompting a hawkish tone from senior Federal Reserve officials.
St Louis Fed President James Bullard told Bloomberg TV on Tuesday that the central bank should “tack in a more hawkish direction” over its next couple of meetings. And money markets are already factoring in a “high probability” of two rate increases next year in June and November. That’s bad news for emerging market currencies because it means King Dollar will stay firmly in its throne through much if not all of next year, pushing up commodity prices and further pressuring economies already struggling with high inflation.
It’s even worse news for emerging markets that have been downgraded to frontier markets and already have collapsing currencies and runaway inflation. Hopefully, Finance Advisor Shaukat Tarin’s prediction about the EFF will come true one of these times, since he clearly seems fond of making them without often giving too much thought to ground realities, because that would limit the amount of loss the rupee suffers for no reason other than completely unnecessary uncertainty.
After weeks of promising that an agreement has been reached and will be announced shortly, he’s now revealed that the IMF has demanded completion of five “prior actions” before it calls a meeting of its board to revive the $6 billion facility. These include withdrawal of tax exemptions, increase in energy tariff, and the SBP (Amendment) Bill. It’s also said that it would no longer accept presidential ordinances as prior actions, which means the bill will now have to be approved by parliament before a meeting can be called about the remainder of the bailout programme.
Surely, that’s not what the market thought the finance advisor meant when he said that an agreement had been reached. And while the finance ministry tries to wrap its head around this particular predicament, because the current political temperature implies that nothing can sail smoothly through parliament, King Dollar will continue to beat the life out of emerging, and frontier, market currencies.
The best thing the government can do for the currency and equity markets is present the unadulterated truth about the status of the bailout programme and when exactly, and at what cost, can its resumption be seriously expected.
Copyright Business Recorder, 2021
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