Rupee traded just shy of 240/$, but was not able to breach that level. Rates in Peshawar & Kabul also slides. Some traders expect this is the ceiling for the Rupee. Where as others don’t believe so. However, some perspective is much needed around these statements to qualify an opinion. Please see below, USDPKR Vol Chart since 1982 (when Rupee was de-pegged & first under managed float).
You will notice the huge Volatility spike recently. In fact, the spike is bigger than any other past event, be it the Nuclear testing or the 2008 financial crises. In fact it precedes even the twin wars and the great devaluation of 1972. Ironically, it is happening even though we are in an IMF program. We spoke to academicians and the general view was that this kind of volatility is not sustainable. Which would mean that this is a make or break phase after which the volatility fizzles out.
What’s working for Pakistan
Pakistan recently got in to the IMF program. It also succeeded in strong arming CAD to a few millions. And it cut back heavily on issuing new import LCs. Weekly inflation has also dipped. Analysts also estimate that though there will be a adverse impact of 150 bps on GDP growth, Pakistan may receive up to $2.6bn in current fiscal in the form of Aid. These developments have slowed down the rate of depreciation, however, two key things will still spell trouble for the Rupee.
What’s not working for Pakistan
A beating on the REER index: even though Rupee is trading around 240/$, JP Morgan estimates REER to be around 97 level. On previous occasions we have seen SBP more comfortable towards the 92-95 level. This could imply some gradual depreciation towards the 247/$ level. Another factor is gradual adjustment of outstanding import documents. While these are stated to be those under the $50k limit, the numbers add up with some estimates that the back log is of around $1.2billion. This will put pressure on forex liquidity.
Dollar Strength haunts economies
The above doesn’t take away anything from the serious challenges being posed by dollar strength. Since mid last year, the index has gained more than 20%, and according to analysts, every time this has happened in the past it has resulted in a serious global crises. Of course the idea of such steep rate hikes is to kill demand, increase unemployment and encourage savings. Most analysts are now factoring in a Global recession and even flagging rate cuts in 2023. The collapse of demand, recession & slowdown in China, in our view, has not yet been priced in to the commodity markets. Oil has leaked for the 4th consecutive week, but the floor may be lower. Supply side mechanics are also improving.
This whole episode of economic winter will not fly by Pakistan and its impact will need to be managed by slowing down the economy immediately with import compression. Emerging economies are particularly vulnerable to the most significant tightening of global monetary and fiscal policy for over five decades, with food security being a dire scenario. Pakistan will have to sufficiently funded as soon as possible, because liquidity will dry up in the coming 3 months or so.
Intervention Needed
Larger economies are waging a reverse currency war with the intention to strengthen their currency. At a time of deep rooted inflation, a stronger currency is bliss. Japan intervened to strengthen the yen for the first time in 24 years as a trio of European central banks sharply raised interest rates, underlining the disruptive impact of inflation on currencies and monetary policy. It was the first time Japan had sold dollars since 1998, according to official data. India has spent roughly $90 billion in supporting its already stable currency. India is also aggressively pushing INR trade with other countries and recently done pacts with China, Saudi, UAE, Bangladesh, and a host of other countries.
Countries are being forced to go it alone in erecting defenses against the relentless strength of King Dollar.
While the SBP is using subtle interventions to tame the market, it’s time to be more vocal and assertive with Creditors & Lenders. While IMF may be more comfortable in REER under 95, there is every reason Pakistan should promote a stable to slightly stronger Rupee with temporary outruns being acceptable to all stakeholders.
Pivot Point
This will also be a great time for Pakistan to restructure all its debts with creditors once & for all, (without touching private lenders). If this is managed professionally, it could prove to be a great push in stabilising forex flows. However, the politicians of the country will have to let go off their aid seeking mentality and speak to the business community to generate growth through conducive & business friendly policies and promoting agriculture once again.
