July was the second worst month in the history of Pakistan in terms of PKR depreciation. The question is how the rupee would move against the greenback in coming months. The Ministry of Finance and SBP believe that the PKR will stabilize at 235-240 levels, before it can appreciate back. The economic fundamentals suggest some appreciation of PKR from current levels. However, political uncertainty is driving the negative sentiments.

The consensus is that the worst is behind us. The story of economic default is overplayed. The current account is coming under control through price adjustments and informal restrictions from the SBP on imports. The import numbers are significantly down in July on actual basis. However, the payment flows of previous months’ imports are still carrying on, and the political uncertainty is no where gone. Thus, without better flows of economic (or political) news, the PKR need stabilizing, before it can appreciate.

Even though the staff level agreement is reached, political uncertainty has created doubts on the money flowing in from the IMF. But putting political uncertainty aside, there are all the economic reasons to say that the PKR has depreciated more than what was required. The currency is certainly undervalued now. The current account deficit is to tame to $500-1,000 million within a couple of months. The REER may be hovering well below 90 at current levels. Once IMF funds come in, external flows and SBP reserves position will improve. However, the sentiments and higher payment pressure dragged the rupee down last month.

The decision of higher energy imports in May and June were the main culprit. The SS regime must be blamed for that. The PM office and the energy ministry disregarded the economic realities and moved against the advice coming from the finance ministry. The time was to increase the petroleum prices immediately. The time was to ration demand by increased load shedding and reduced number of working days and hours. The time was to not import LNG on spot and other fuels at peaking prices. However, what they did was the exact opposite.

The current account deficit stood at $2.3 billion in June. The energy import bill stood at $2.9 bn. The SBP bill is based on payment which usually takes place weeks after the actual imports. Sources reveal that within energy payments in June, 30 percent was imported in April, 30 percent in May and 40 percent in June. Based on this trend, around 60 percent of payment in July was due to the previous two months (May and June) and rest is of July.

Thus, the current account deficit could come around $1-1.5 billion in July, and the number to be much better in August as the imports in July are significantly less. According to the finance ministry, in July (till 28th), the total PBS imports were $4.5 billion – energy at $1.2 and rest of all at $3.3. The energy fell to one-third from June’s number while the others have a decline of around one-fourth or $1 billion. All these would translate into lower payment pressure in August and September.

Then high-powered economic indicators are suggesting that the economic slowdown due to price pressures and informal bans are higher than what was anticipated by the SBP. Thus, the import payments pressure should reduce significantly in the coming quarter or two on a quantum basis. Any slippage in energy and other commodity prices could be a bonus.

Seeing that, the inflows are going to be better. Many exporters and remitters have slowed down the inflow in the last couple of weeks due to the free fall of PKR. Now the inflows are likely to be better in the next few weeks.

In short, all the indicators suggest PKR appreciation from the current levels. It surely would stabilize (assuming no negative news flow on political front) and may appreciate once the sentiments reverse.