In the recent weeks, currency has remained as volatile as the political scene in the country. There was a compete drama going on. The slippage started from PKR/USD parity of 177 at the beginning of March to 189 by first week of April and then the euphoric strength from 189 to 181 in the second week of April. And now the resumption of weakening again in the third week – it closed at 184.4 yesterday.

The honeymoon period for the newly formed government proved to be short-lived. The reality is sinking in that mere a few words of Dar about the currency could not do his magic. The real issue is boosting the foreign exchange reserves. There are no two ways about. Even in the last week reserves were down by another few hundred million to stand at $10.8 billion – covering 6 weeks of imports. Rollover of $2.4 billion is coming in; but that won’t be enough. The other rollovers are eyeing at the IMF.

Interestingly, SBP did not intervene as such to curb speculations due to the political uncertainties in the last month. It did allow the PKR to weaken with deteriorating political situation. A sizeable weakness in the PKR (almost 12 rupees in 37 days) at a time when the sitting government was facing its toughest political battle, and then a huge bout of strengthening (almost 8 rupees in 6 days) as soon as the government changed hands seems rather odd. There is something more than the economics was in the play.

Then the exporters and punters got confused by the statement of Dar, after SS becoming the PM. Exporters panicked and started selling to let the PKR to appreciate. But that story could not live for long. The real game is to build reserves and for that IMF is the key.

Yes, it’s nothing but the IMF. No magic, Just the IMF. The new FM is crystal clear on it. The problem is with the overall political situation. The ousted PM is galvanizing public support and has proven his popularity. That is pushing the coalition government at the back foot. They are taking time to revise the petroleum and electricity prices. And these revisions are imperative for the IMF nod.

Pakistan is in a tough situation. The lenders are losing confidence. Fiscal slippages are growing, and these have obvious implication on the current account. That is why these are called twin deficits. Although the current account deficit is coming in control, but without putting fiscal house in order, it’s a matter of time before the current account to slip further. Seeing this, international lenders are uncomfortable.

The yield on the international bonds are growing. That is hindering government capacity to raise from the international debt market. Commercial lenders are swaying away. Even bilateral are conditioning on the IMF’s nod for rollovers. The multilateral always seeks IMF’s report.

However, having said that, economic fundamentals are not that weak. There are signs of dent on the economic demand. But growing commodity prices are challenging it. Real Effective Exchange Rate (REER) was 97.9 in Feb when the PKR/USD averaged at 175.7. Based on the steep nominal depreciation, the REER must be around 92-95 as of now.

This along with lower CAD in the last months (and expected low in March) makes a case of slight appreciation of PKR. But these fundamentals are overshadowed by weakening sentiments owing to fast falling reserves. It is imperative to calm the anxiety, and that none other than the IMF can do.

Thus, if the IMF is back on track, PKR can get back and move in the band of 175-185. Otherwise, don’t ask about the levels. The second trigger could be upcoming visit of PM to Saudi Arabia.