The Pakistani rupee is predicted to maintain stability in the upcoming week due to increased chances of resuming the bailout program, backed by Saudi Arabia’s commitment to Pakistan’s deposits with the International Monetary Fund (IMF). Investors also anticipate similar funding support from the United Arab Emirates (UAE).
The local currency experienced significant volatility during the past week, closing at Rs284.65 against the US dollar in the interbank market on Friday. To control inflation, the State Bank of Pakistan (SBP) increased its benchmark interest rate by 100 basis points, bringing it to 21%.
The optimism surrounding the resumption of the IMF loan is fueled by Finance Minister Ishaq Dar’s reassurance that the IMF deal is on track. Dar explained that all requirements from Pakistan to conclude the ninth review of the $6.5 billion loan program with the IMF were complete. Therefore, the only remaining step is to confirm a $1 billion commitment from a friendly country.
Dar addressed the nation after canceling his trip to Washington for the IMF and World Bank’s spring meetings, citing domestic political unrest.
A currency dealer stated that the rupee is expected to trade range-bound next week due to positive sentiment from the increased odds of the IMF program resumption. Although there will still be demand for the dollar from importers, remittances are anticipated to increase supply.
Saudi Arabia has confirmed to the IMF that it will provide Pakistan with $2 billion in assistance. According to the finance minister, Pakistan only needs to secure a $1 billion promise from one friendly country, the UAE. Once this is achieved, all prerequisites for completing the staff-level agreement will be satisfied. It will then take two weeks for the issue to be discussed at the board meeting.
As of March 31, Pakistan’s foreign exchange reserves held by the central bank dropped by $36 million to $4.207 billion. The SBP’s reserves are sufficient to cover around one month of imports. The central bank cited external debt repayment as the reason for the decline in forex reserves. With low foreign exchange reserves, the central bank has been discouraging letters of credit for non-essential imports. The government has also increased sales tax on the import of numerous items from 19% to 25%, categorizing them as “luxury.”
Due to a shortage of import-based inventory, import restrictions have compelled many companies to reduce their production activities.
Regarding external funding requirements, the SBP governor stated at an analysts’ briefing after the monetary policy meeting on Tuesday that out of the $23 billion debt repayment in FY3023, $18.5 billion had been repaid or rolled over. The remaining external payments for the next three months of the fiscal year stand at $4.5 billion, of which a $2.3 billion loan is likely to be rolled over. Consequently, the net external payment for the next quarter of the current fiscal year amounts to $2.2 billion.
The central bank has revised its FY2023 current account deficit target from $10 billion at the start of the year to below $6 billion.
