July 07, 2022 (MLN): The miserable Pakistani rupee (PKR) has spent another fiscal year in twilight backed by weather-beaten macros and political melancholy as the local unit smashed by as much as Rs47.30 or 23.09% in FY22 against USD to close the year at PKR 204.85 per USD compared to the appreciation of 6.6% recorded in FY21.

Down the line, FY22 acted like a wet pitch for the local unit which kept economic managers perplexed to grip the sliding PKR. From economic managers to the analyst fraternity, everyone is of the view that long-losing streaks are due to hovering clouds of uncertainty on the political and economic front.

This sharp depreciation has also caught the attention of the general public and become the talk of the town, especially after the ouster of former Prime Minister Imran Khan. From April 10, 2022, to June 30, 2022, the rupee fell by 10.70% and there is no turning back except for temporary marginal gains which also turn into losses after a few sessions.

Before this, in March 2022, the currency lost its worth by Rs6 or 3.27% against the US dollar, compared to the notable appreciation in March 2021, wherein, the local unit secured its position by 3.50%.

All credit goes to the no-confidence motion against the former Prime Minister which had badly shaken the sentiments of the market, creating an environment dubious for the local currency.

It even crossed the psychological mark of 200 per USD in the later months of FY22 and touched its historic high of 211.48 per USD on June 22, 2022.

Commodity headwinds along with unfunded subsidies by the previous government to get the political mileage messed up Pakistan’s current account deficit. Adding more fuel to the fire, a sharp depletion of foreign exchange reserves amid the delay in IMF’s tranche, and the coalition government’s indecisive attitude towards the compliance of the fund’s major conditionalities remained the major factors behind this historic collapse. 

The government’s confusion while taking economic decisions has resulted in lousy outcomes and the situation created enough panic amongst the market participants. Resultantly, the dollar hoarding and speculative elements had become stronger than before.  

Finally, after bearing much pressure, the coalition government decided to take unpopular decisions to comply with the IMF tranche and made a fresh start through gradual unreeling of subsidies and imposition of taxes in the name of fiscal consolidation. As of now, the government has increased petrol prices by a whopping Rs98 per litre since May 26, 2022. Meanwhile, in the latest round of hikes, the government started imposing petroleum levy of Rs10 per litre.

The news of unreeling subsidy become a breath of fresh air as market sentiment has been approved as the local unit recovered by 3.5 rupees in the last three sessions of May 2022. Economic experts were of the view that this measure would pave the way toward the required IMF tranche along with financial assistance from other friendly countries to improve the foreign exchange reserves of the country.

However, Pakistan has not yet received a single penny from IMF under EFF program but the coalition government is in continuously in talks with the fund.

In a major breakthrough, the fund shared the draft of the Memorandum of Economic and Financial Policies (MEFP) for the combined 7th and 8th reviews in the last days of FY22 which helped PKR to witness a temporary respite.

Moreover, this temporary respite was also the reason $2.3bn was received by SBP from China.

Experts said, “This was the most significant step to validate that both sides have reached an agreement for the revival of $6 billion programs.”

In order to remove the haze of ongoing crises, the State Bank of Pakistan (SBP) increased the interest rate by 150 basis points to 13.75% on May 23, 2022, while emphasizing the need for fiscal consolidation that would help moderate demand to a more sustainable pace while keeping inflation expectations anchored.

Pakistan under ripple effect of commodity crunch

Global shortages of fuel amid geopolitical chaos have affected Pakistan’s economy in terms of a soaring import bill of $80.5bn in FY22, threatening a further wave of inflation and a notable rate hike.

It is worth mentioning that a 13-year high inflation mark is making a strong case for another rate hike in today’s MPC meeting.

The drama of commodity headwind started right after Russia's invasion in Ukraine which had fueled geopolitical instability. Oil prices moved beyond $100 a barrel earlier this year, exacerbating worries while outpacing a robust recovery in fuel demand after the coronavirus pandemic.

Resultantly, the deteriorating current account balance of Pakistan reached $15.2bn from July-May 2022. In addition, the shrinking foreign exchange reserves have also played due role to pressurize the local unit as the total liquid reserves stood at $16.2bn as of the week ended on June 24, 2022.

In the fear of recession, investors are considering the dollar as a safe haven which resulted in elevated demand for the dollar against all the major currencies. Thus, it is natural for gloomy PKR to lose its value further.

Outlook:

Since commodity prices have started cooling off on concerns of interest rate hikes to combat high inflation which could trigger a recession and dampen oil demand, the PKR would see some respite as the import bill will be dropped significantly.

Analysts are of the view that Pakistan will be out of the grey list after the FATF team’s onsite visit which will attract foreign direct investment in Pakistan and improve rupee-dollar parity. 

Fahad Ruaf, Head of Ismail Iqbal Securities told Mettis Global that PKR will remain above the level of 200 per USD in FY23 after witnessing a temporary respite.

On the other hand, Malik Bostan, President of Forex Association of Pakistan said, “There are notable developments underway that would support PKR to gain back its ground in coming days.”

Speaking to Mettis Global, he highlighted that the coalition government is in talks with Saudi Arabia to enhance the oil facility on delayed payments facility to $3.6bn from the existing $1.2bn facility.

He also added that the United Arab Emirates (UAE) has offered to buy minority shares in publicly-listed companies at a negotiated price in response to Pakistan’s request for fresh loans. If the government accepts the offer, it will give a big boost to the cash-strapped economy.

“The government is seriously working on other options to attract dollars in the country along with strict compliance of IMF conditionalities so the tranche could be unlocked as soon as possible,” he noted.

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