Pakistan Rupee
The Pakistan rupee dropped by 12 per cent to the dirham in the year-to-date. Will the IMF deal mark a turnaround? Image Credit: Bloomberg

Dubai: Pressure has mounted on the Pakistan rupee in recent weeks, with everything now hinging on whether the government strikes a deal with IMF over the release of new funds.

Currency exchange houses here say that the Pakistan rupee could test the 50 to a dirham mark in the next few days if the IMF deal is not wrapped up soon. On Friday, the exchange rate is at 48.35 to the dirham, with the currency having declined 12 per cent this year. (Check the latest currency exchange rates here)

For the rupee’s short-term chances, everything hinges on how quickly the government can wrap up the IMF deal. The one big positive in recent days has been the deal struck with Saudi Arabia whereby the country will deposit $3 billion with the Pakistan central bank.

“Since the Imran Khan government has come to office, the rupee has declined from 115 to the dollar to about 177 at current levels,” said Sameer Lakhani, Managing Director at GCP, a consultancy. “In recent weeks, the pressure has accelerated with the rupee moving from 162 to 177, as talks with the IMF were extended.

“Monetary policy has been tightened and the State Bank of Pakistan (the regulator) has been granted autonomy, which was part of the agreement with the IMF.”

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Heavy on remittances

Remittance volumes from the UAE to Pakistan had started 2021 on a high and those patterns remained right through. “With stricter compliance norms required by US and UAE authorities, we saw some big transactions to Pakistan go through exchange houses,” said a senior official at Joyalukkas Exchange. “In 2020, the rupee-dirham was around 43.54 and had touched 45.50.

“This year, the rupee had to deal with debt repayments by the Pakistan government, dollar reduction in that market, as well as inflationary pressures. This is why there is the added pressure in recent days – the 50 to dirham is a strong possibility by end December/early January.”

That is, if the IMF deal does not pan out in this timeframe.

No more rate hikes in near future, says SBP chief
Pakistan's central bank will pause interest-rate increases to preserve economic recovery after delivering Asia's boldest hikes since September, Governor Reza Baqir said to Bloomberg.

"We are going to take a pause to first look at the effects of the tightening we have already done," Baqir said. "Fiscal policy has been very complementary and is also withdrawing stimulus - so a coordinated macroeconomic response, we think, will be number one to sustain recovery and keep inflation broadly in check."

A wider current-account deficit, faster inflation and stronger economic growth are factors that could get the State Bank of Pakistan to resume its rate hike journey. Despite the rate increases, Baqir expects the economy to grow 5% in fiscal year ending June, after expanding 4% a year ago.

The SBP has raised rates by a cumulative 275 basis points in three moves since September to tame the region's fastest inflation and check a larger-than-anticipated gap of $5 billion in the November print of current account - the broadest measure of trade.

That's taken a toll on the rupee, which has been the worst performer for the past six months among 13 Asian currencies tracked by Bloomberg. The pressure on the rupee is going to dwindle once demand drops, Baqir said.

- Bloomberg

Next steps

To land the deal, “A mini-budget is due in the next few days, which will presumably pave the way for an IMF agreement and the release of funds,” said Lakhani. “That is expected to give the rupee some respite. Apart from economic challenges, the geopolitical situation with Afghanistan has also weighed on the currency - but there is optimism the current adjustments will finally pave the way for a broader recovery for the economy and the currency.”