The stability of the Pakistani rupee in the coming weeks is intricately linked to the government’s ability to address critical external financing gaps, primarily concerning the ongoing uncertainty surrounding the International Monetary Fund’s (IMF) loan program.
The prevailing ambiguity surrounding the IMF’s $7 billion loan package has led to increased pressure on the rupee, which may further depreciate against the U.S. dollar if these gaps are not promptly addressed.
At the core of the issue is the government’s need to roll over existing debt while securing additional financing from commercial banks, international investors, and bilateral partners. The challenge is compounded by Finance Minister Ishaq Dar’s task of obtaining favorable terms within a restricted timeframe, as IMF board approval hinges on closing these funding gaps. The potential for delays in the program could exacerbate market instability, making the rupee more susceptible to volatility.
In the interbank market, the rupee demonstrated some fluctuation over the past week. It commenced the week at 278.64 per dollar, weakening slightly by mid-week to 278.76. By Friday, however, the currency had regained some strength, closing at 278.56. While these fluctuations remain modest, the possibility of a breach beyond 279 per dollar looms large, primarily driven by the IMF-related uncertainties.
In light of declining global oil prices, market participants hold a cautiously optimistic outlook. Brent crude oil’s current trading price, around $71 per barrel, provides some respite for the rupee. However, optimism remains tempered by the unresolved external financing gaps, which continue to exert downward pressure on the currency.
Exporters, meanwhile, have exhibited a reluctance to engage in forward selling of dollars, indicative of cautious sentiment. Liquidity in the interbank market has tightened, reflected in higher swap premiums for shorter tenors. This liquidity squeeze is a signal of constrained financial conditions that may persist unless swift resolutions are reached.
Expectations are high as the State Bank of Pakistan (SBP) approaches its upcoming monetary policy meeting on September 12. Analysts anticipate a possible interest rate cut in the range of 100-200 basis points, a response to the significant decline in inflation, which has dropped to 9.6 percent in August. However, there remain several mitigating factors that may limit the extent of the rate cut. These include sluggish economic growth, subpar tax collections, and concerns over fiscal constraints, all of which could prevent a more aggressive monetary policy adjustment.
Further complicating the situation are concerns over dollarization and the outflow of speculative capital from treasury bills. A rapid decline in interest rates could lead to renewed fears of capital flight, particularly from short-term instruments, as seen in August’s outflow of “hot money” from T-bills. This dynamic further restricts the SBP’s maneuvering room as it weighs the potential risks to currency stability against the imperative to foster economic growth.
External factors also contribute to the precariousness of the rupee’s outlook. Global market sentiment, especially in the context of U.S. economic recession fears and the steepening of the U.S. Treasury yield curve, poses additional risks. These macroeconomic developments, compounded by political uncertainties stemming from the upcoming U.S. elections, could amplify volatility in emerging markets like Pakistan.
In sum, the trajectory of the rupee remains contingent on the government’s ability to effectively address external financing needs while balancing domestic economic pressures. The impending decisions by the SBP, coupled with the outcomes of ongoing negotiations with international financial institutions and bilateral partners, will be crucial in determining the rupee’s path amid an increasingly complex economic landscape.
