Karachi, September 17, 2021 (PPI-OT): Pakistan Rupee likely to take pressure for remaining FY22; expect status quo in the upcoming MPS

We expect Rs to lose 5% more till Jun’22 despite losing 10% from its recent high as external pressures continue to emerge from rising imports, increasing freight costs from port congestion, Afghanistan demand after the US exit and slowdown in sequential growth of remittances.

Instead of succumbing to speculative activity on the local currency, SBP is expected to keep interjecting instead of raising policy rate till the time external financing avenues reopen once Pakistan proceeds with IMF on conducive grounds.

Small injections may come forth till SBP decides to introduce a rate hike: The recent events on the external front, despite huge tailwinds in the form of fresh SDR allocations from IMF and Eurobond issuances, continue to put Rs under pressure as demand of the greenback continues to stem from rising imports, increasing freight costs from port congestion, Afghanistan US$ demand after the US exit and slowdown in sequential growth of remittances. All this received more jitters on the ballooning Current Account Deficit where our base case stands at US$10.9bn deficit or 3.1% of GDP, slightly higher than the SBP forecast range of 2-3%, for FY22.

Speculation will continue to emerge: In this backdrop, many savvy players have also emerged to speculate on the depreciation of Rs but such moves have been attenuated by SBP’s intervention. More likely so as the expectations of meeting sufficient external financing requirements for FY22 remain contingent on how Pakistan is able to conclude talks with the IMF for the 6th tranche of the Extended Arrangement under the Extended Fund Facility (EFF). Pakistan is set to start staff-level meetings with the Fund on September 29, 2021 with final approval for the sixth tranche by mid-Oct’21. This move will likely pave way for various multilateral and bilateral flows to be made available.

Gross reserves of Pakistan are at ATH levels and depict a healthy Net International Reserve (NIR) Position: Pakistan’s Gross Reserves are already at an all-time high level (slightly over US$20bn), previous high of US$19.46bn seen in Oct-2016, after it received fresh SDR allocations of US$2.75bn from the Fund, few months after Eurobond issuance of US$2.5bn (Mar-2021) and a tap issuance of US$1bn (Jul-2021). Foreign currency obligations of Pakistan, as per Jul-2021 data reported by State Bank of Pakistan, stand at US$16.65bn (principal) and US$1.80bn (interest). Simultaneously, the SBP has reported availability of external inflows that are expected to be more than sufficient to meet external financing requirements for FY22.

The current forward liabilities and swaps position for the country is US$7.6bn and we expect Rs to end FY22 at 176.4 against US$, which is c. 5% from current levels. If deliberations pan out smoothly with the Fund, Pakistan may likely be able to finance the rising Current Account pressures (JS estimates: US$10.9bn or 3.1% of GDP).

We expect SBP to keep rate unchanged in 20-Sep-2021 announcement: While it may be imperative for SBP to control FX rates via an increase in policy rate, the current speculative activity in US$ by savvy investors and any upcoming ones may likely entail some injections to attenuate such behaviour that may exert on the movement of Rs, more than needed. We do not expect a rate hike from SBP at this moment, as the fourth wave of COVID19 is not over yet, leveraged industrial entities may continue to need this policy stimulus as the commodity super cycle exacerbates cost pressures, and the NIR position has considerably improved. However, the exchange rate should take pressure from rising imports and any speculation on this front may face SBP intervention, as and when needed.