The pressure on the currency is building again. The PKR/USD bounced back from 175, after the news of deferred oil facility and deposits from Saudi Arabia. The party was short-lived, as currency after coming back to under 170 within six trading days, is now (in five trading days) approaching close to 175. This kind of seesaw movement in such a short period is unprecedented, since the currency movement is market based.

There is no point of giving currency levels. The situation is fluid. Pakistan’s economic fundamentals haven’t changed in the last week or two. There were payment pressures in October, and the situation hasn’t changed in November. The currency bounced back from 175 in last week of October due to the news of deferred oil payment deal and deposits from Saudi Arabia. Now the delays in the IMF review are having the impact. Both the movements are sentiment based, as fundamentally, the weakness is evident. Plus, strengthening of USD against other currencies is partially explaining the depreciation that has been happening.

The currency movement changes direction along with the change in sentiments. For example, exporters were holding back dollars, as they were expecting PKR to settle (after continuous depreciation) before bringing back export proceeds. After the Saudi Arabia (to be) inflows news, exporters started to bring proceeds and that had enhanced the dollar supply. Now exporters’ proceeds are drying, and some are waiting for PKR to depreciate further. A flip argument is opening L/C for importers. The outcome is similar – when the sentiments are negative, the currency depreciates and vice versa. This argument is true in the short run while fundamentals drive medium to long term.

Another reason for PKR to appreciate in the last week of October was announcement of real effective exchange rate (REER). The reading came at 95.86 for Sep 21– lowest reading since Sep 20. Based on Sep 21 numbers, Oct 21 reading could have been at 91-92. However, now the market is discounting REER.

One fundamental reason is USD appreciation against other currencies. The inflation number of the US has shocked many – at 6.2 percent is thirty years high. Seeing that, the monetary tightening could be earlier in the US, and that is making USD index stronger. Technical analysts based on chart movement are depicting USD’s further strength. That would not bode well for PKR/USD movement.

However, if REER is any guide, fundamentally PKR is undervalued by some percentage points. For PKR to have any strength, the sentiments ought to be positive. There is only news of delay on the IMF front. The money from Saudi Arabia has yet not been transferred. The news is that $3 billion will flow in soon. That would be good for sentiments. The more important news is the IMF.

Then the deferred oil payment facility (once signed) will take 2-3 months to come in action, as currently payments are made on the previous months’ contracts. And there is an immense payment pressure. Authorities are asking PSO to go for financing from banks (against FE25 deposits) to not let SBP intervene for lumpy oil payments. PSO’s limit of financing is breaching, and banks are asking SBP to relax party limits in this case.

These deferring payments are like kicking the can down the road. It is beneficial if oil prices calm down. However, if the oil prices go further up and sustain at high levels, then it’s a big worry. In case of Saudi oil payment facility, based on experience, government may continue to linger on or get waivers on payment.

In a nutshell, overall external account situation is not good. Commodity prices are sustaining high levels. The global inflation shock is causing interest rates in developed markets to move up. That is not good for emerging economies where portfolio outflows can take place – though with no debt flows, that is not a big worry for Pakistan. But based on interest rate differential, Pakistan’s currency could come under pressure. Then opening of travel to put pressure on remittances and could generate demand from exchange companies – already they are under pressure due to Afghanistan’s demand.

Seeing all the factors, nod from the IMF is imperative for currency stability. Keep your seat belts fastened.