The Naya Pakistan has some Naya kind of currency movements. The big fluctuation in the open market without the influence of interbank market is kind of unprecedented. The euphoria is driving the market; just like it is in the equity market. And it’s not sustainable by any chance; as the economic reality has not changed post-election day.
The story is that dollar-hoarding started taking place since the day Hudabiya case was opened against Ishaq Dar; at that time the rupee-dollar parity was around Rs105. The economic fundamentals worsened since then as both current and fiscal accounts deficit started heading south. The political climate was dicey as none of the pundits were expecting any single party to win over 100 seats in national assembly.
In the process, not only the dollar or foreign currency hoarding was taking place in the open market; the international traders, foreign companies operating in Pakistan and others were also trying to keep as much liquidity in foreign currency as they could. Exporters were stopping proceeds to come back in the country; MNCs were repatriating profits much higher than the normal pace; and home remittance inflows slowed down as well.
This had created a ripple effect. The current account deficit suddenly touched $2 billion for three straight months. The other current transfers were too high while exports failed to pick up to match the incentives given to them. The uncertainty resulted in slow response to amnesty scheme while the deteriorating external account situation amid political uncertainty stopped all kind of bilateral and multilaterals foreign exchange flows.
Post elections, the political uncertainty is gone; the PTI is set to form a government without any major coalition. The Kingdom of Saudi Arabia’s (KSA) ambassador met Imran Khan and reportedly committed to give $2 billion cash support to Pakistan – a deferred oil payment facility could be apart from it. The love from China is unconditional as the country has reportedly pledged to lend another $2 billion to Pakistan. And the IDB oil credit facility of $4.5 billion is surely a booster.
The immediate economic need is to get as many dollars as the country can. The pledges and commitments revived the feel-good factor. This coupled with restrictions of dollar movements by SBP (effective from 24th July) triggered the reverse of bank-run in the open market. The central bank stopped importers to trade through open accounts and increased the cash margins to 100 percent against imports. Apart from that, the noise, that inter-provincial foreign currency movement has been restricted.
All these steps pushed the panic-button amongst the hoarders and suddenly over the weekend open-market was flush with dollars and the currency rate came down from Rs130 against the USD to Rs122.5. Yesterday, the currency touched the high of Rs122.5 in the interbank market and after the SBP started intervening, the rupee-dollar parity settled at 125.
The question is: what would be the direction of the currency? But more important to ask is: would the country be knocking the doors of IMF? The currency may hover around the level it closed in the interbank market yesterday. The erratic movement in the open-market may settle soon as the SBP should continue to buy dollars the hoarders are selling. This would not only reduce the volatility but also give much-needed foreign ammunition to the central bank.
The question of going back to the IMF is becoming tricky. The money from IMF is primarily for balance-of-payment support and cannot be used for fiscal support. The important point is the letter of comfort from the IMF which is usually required for bilateral and especially multilateral flows, apart from opening avenues of global capital market.
A contrary view to the IMF programme is that if Imran’s feel-good factor is giving the comfort to foreign lenders, supporters and investors, does the country even need a Fund programme? The optimists are hoping big money to come from China, Russia, KSA and others. The expat Pakistanis are also geared to send money back home to support the cause.
BR Research thinks that the feel-good factor is overplayed as a bird in hand is worth two in the bush.
The PTI’s economic team needs to capitalize on the euphoria and should immediately contact the IMF for negotiation.
This may give levy to the presumptive finance minister, Asad Umar, and his team to negotiate on better terms. Else, few months down the road, the fund programme would become inevitable and terms at that time would be of Fund’s discretion. Plus, the tough reforms are easier to instill under the umbrella of the IMF.
However, the incoming finance minister is tight-lipped on the agenda. In an interview published today by BR Research, Asad responded to IMF question by saying that all options were on the table, including going to the IMF, relying on friends of Pakistan, or raising diaspora bonds.
A decision will be taken after the cabinet is sworn in and in quick time, he suggested. Let’s keep the fingers crossed.
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