Pak rupee rally continues

The Pakistani rupee is expected to sustain an upward trend in the short term on positive economic indicators but unlikely to keep the momentum in the longer period, experts say.

The currency, which hit over one-year high at 154.58 to the US dollar in the interbank market on Friday, has recovered almost eight per cent in the past seven months to date since it hit an all-time low of 168.43 against the greenback on August 26, 2020. It appreciated 3.28 per cent against the US dollar this year so far.

Analysts and currency experts attributed the sharp growth in rupee to higher remittance inflows, growing foreign exchange reserves and manageable current account deficit. Market insiders also credited strong recovery in the rupee’s value to the government’s plan to raise up to $1 billion through floating eurobond to strengthen its foreign currency reserves and launch another bond worth $500 million to raise funds for power infrastructure projects in the country. However, they said the rupee may not be able to sustain at the low level for a longer period, as strong currency would discourage exporters to book future export orders.

IMF aid is back

Samiullah Tariq, head of research at Pakistan Kuwait Investment Company, said flow of foreign currencies has improved during the post-Covid-19 pandemic that benefitted the Pakistani currency. However, some challenges remain for the currency in the medium- to long-term period.

“The rupee is likely to appreciate against the US dollar on account on positive economic indicators as well as stability in the economy. In my view, it should reach 162-163 by December as the currency should adjust according to inflation differential,” Tariq told Khaleej Times.

Last week, the State Bank of Pakistan (SBP) revised its growth target for the fiscal year to around three per cent from previous estimate of slightly above two per cent.

The central bank also left its key rate at seven per cent, the lowest in almost three years, to support a nascent economic recovery amid a resurgence in coronavirus cases. This was the fourth time the SBP has stood pat after cutting rates 625 basis points in the first half of last year to help weather the pandemic-induced economic slowdown in the country.

“Main reason for the rupee’s appreciation is stronger inflows under Roshan Digital Accounts and higher remittances during this financial year. The resumption of the IMF plan and release of $500 million tranche under its $6 billion facility will further strengthen the rupee in the near future,” Tariq said.

On Wednesday, the International Monetary Fund (IMF) announced that it approved a $500 million disbursement to Pakistan for budget support. The latest payment brought total disbursements under the extended fund facility to $2 billion since the programme was first approved in July 2019.

“The resumption of IMF plan is expected to firm up repayments of existing loans as well as strengthen forex reserves of the country,” Tariq said.

Positive indicators

Pakistan’s foreign exchange reserves rose $275 million to $13.295 billion in the week ending March 19, compared to $13.019 billion in the previous week, according to latest central bank data. The overall reserves, including held by commercial banks, increased to over 13-month high at $20.43 billon, reflecting an increase of 1.3 per cent.

Overseas Pakistanis also remitted 24.1 per cent more during the July-February period as they sent $18.74 billion to back home. The country received over $2 billion remittances every month since June 2020 and similar trend is likely to continue for rest of the 2021.

Moreover, the country’s current account deficit declined by 75 per cent year-on-year basis in February and 76 per cent month-on-month basis to $50 million, compared to a deficit of $197 million in Feb 2020 and $210 million last month. The current account during the eight months of financial year 2020-21 is still in a surplus of $881 million compared to $2.7 billion deficit during the same period last year.

Testing new highs

Vijay Valecha, chief investment officer, Century Financial, said the rupee appreciated due to positive economic indicators.

“With almost eight per cent gains from its peak lows of near 169 seen during the height of the pandemic last year, the Pak rupee has come a long way with the currency on track to retest its last year’s high of 153.7 against the dollar. While a wave of positive factors has helped the currency’s gain over the last seven-month period including IMF bailout agreement and cooperative stance by Pakistani central bank, multiple short-term factors are also giving strength to the rupee’s current rally,” Valecha told Khaleej Times.

Elaborating, he said one of the major factors happens to be the news that Pakistan is hiring a consortium of global banks for its dollar denominated eurobond. The expected ticket size is in the range of $750 million to $1 billion.

“The government has mandated Deutsche Bank, JPMorgan Chase & Co, Credit Suisse Group, Standard Chartered and Emirates NBD Bank. Pakistan is also separately planning to issue a $500 million green note in the next few months to help its renewable energy projects,” he said.

Valecha said the country would like to increase the pace of the planned borrowing so as not to incur heavy interest rates. Global bond yields are currently in upward trajectory, he said.

On the domestic side, he said cancellation of March 26th planned protests against the government has helped calm market nerves.

On the monetary side, he said majority of the economists now expect the SBP will hold benchmark interest rates at current levels for long.

FATF decision weighs

To a question about the outlook over the next six to nine months, he said a lot will depend on the final verdict of FATF regarding Pakistan’s exclusion from the grey list.

“With the verdict expected around June period, the rupee is unlikely to show any further sharp gain till the end outcome is known. A scenario where the country does manage to get itself excluded from the grey list could likely mean the currency breaking below 150 levels versus the US dollar. A break below these levels could further cause the rupee to touch its mid 2019 highs of 138-145 against the greenback” he said.

Commenting on the recent strengthening of the Pakistan rupee, a representative from LuLu Exchange said that some key investments from GCC countries have helped position the Pakistan rupee at its present high.

“It is expected that the Pakistan rupee will not breach the 154 mark against the US dollar and might bounce back towards 158 within a few days,” he said.

“It is also estimated that the outflows from the UAE will increase during the holy month of Ramadan, which begins in mid-April. All of these corresponding factors may move the rupee to the range of between 152.60 and 160 in the next three months,” he added.

— muzaffarrizvi@khaleejtimes.com