Ahmed Mukhtar Naqshbandi
With the current government paralysed in to inaction, it took the Deputy Assistant Secretary of US Treasury, to fly down and advise the government of Pakistan that there is no other way but to follow the IMF prescribed reforms. Following this, it is observed that a flurry of measures, including the ongoing currency devaluation and preparing a mini-budget to steady the ship.
Has the devaluation been done?
Following 2 days of devaluation, USD/PKR jumped from 229.50 to 262.60 (+33/$), at one-time trading at 264 as well. Most analysts are of the view that Rupee will weaken to 275, and then consolidate towards the 270 level as IMF approves the program.
They cite several reasons for these levels, with one being of a recent precedent – Egypt, which just reentered the IMF program and its currency was devalued by 20%.
What Can be Told from Friday’s Trading Session
While, there was no intervention in the forex market on Friday, the USDPKR struggled to go up beyond 264, and after staying at that level, receded somewhat to close at 262.60. Indeed, there was interest from exporters are these levels.
More Export Proceeds To Follow
If we look at ERF (export refinance facility) figures, exporters have drawn more loans (25% higher) even though export activity was low. This suggests that exporters borrowed in the local currency (at high rates) but did not bring in their export proceeds. Analysts estimate this figure to be around $2.5bn.
Now having a windfall (+33/$) they may not wait for PKR to depreciate further in a race to 1) payback their high interest money and 2) to quickly procure raw materials before the prices jump up.
Importers Surprised
In the backdrop of this change in equilibrium, banks started to call clients (mostly exporters) to partially settle their backlog of imports. Market estimates of back log go beyond $3bn with at least $1.7bn in crucial or immediate imports.
Grey Market
While the last quote on Friday evening was 278/280, it was of much smaller amounts. Market sources said that most of high volume deals were done on Thursday at the 270 to 272 levels.
Swap market
Post devaluation, the swap market eased, showing signs of some infusion of liquidity. 1 week and 1 months swaps climbed from -20 & -10 to 10 & 20 levels. It is expected that next week there will be more consolidation
Inflow of funds
In spite of interest rate hike and the devaluation round, there are still differences between Pakistan and the Fund. But it seems like Pakistan’s position has changed from resist to negotiate. If things fall in to place, we may see IMF inflows as early as mid February. And an IMF staff level agreement will most likely pave way for more substantial inflows from friendly countries and multilateral agencies.
The market does seem to factor in that the IMF deal will materialise as can also be witnessed from PSX which recorded highest weekly gain since last April of more than 2,000 points.
PKR Outlook
Keeping the above in mind, the market will struggle to go above 270 in the short term, correcting to 265 levels, if there are no negative news on the IMF or the political front. But traders will keeping a close watch on depleting reserves which went below $10bn for the first time in years (last week change negative $902mn).
Is devaluation necessary
There seems to be a misunderstanding when leading economists talk about a market-based exchange rate. It means there has to be a market place, which can not happen unless the forex market is deregulated, has more market makers and modern products. It doesn’t mean devaluation as even after devaluing the State is holding on to a new level. But deregulating the market is long drawn process, but something that needs to be done.
Dollar Index
The dollar index is at its lowest level in months, trading just above 101, as traders expect the Fed to abandon its stringent quantitative tightening to a more dovish stance. Most major currencies and some Asian currencies (including China & India) have strengthened against the dollar.
US Debt Ceiling
The US debt ceiling will be in the news in the next few weeks as US is fast approaching its debt limit. Expect some fireworks
