KARACHI: Fresh inflows from China will keep the rupee stable in the coming week as sentiments in the market — which has been wary of the stalled International Monetary Fund (IMF) programme — strengthened after the refinancing was confirmed, The News reported Sunday.
The local unit maintained a range-bound trading pattern against the US dollar during the outgoing week in the interbank market. It closed at 287.63 against the dollar on Monday and 287.19 on Friday, gaining 0.15% during the week.
Aforeign exchange trader said: “After Pakistan has received Chinese inflows, the market is likely to respond favourably. This is encouraging because Pakistan's reserves held by the central bank fell below $3 billion following the repayment of the commercial loan to China."
He envisaged that the rupee value would not change significantly in the week to come. “The rupee will be supported in some way by an uptick in the supply of hard currency as Pakistanis living abroad send more money home to buy sacrificed animals for Eidul Adha,” the trader added.
As a refinancing of a loan that was already paid during the outgoing week, Pakistan received $1 billion from China on Friday. Both of the transactions are not represented in the country's position in its foreign exchange reserves as of June 9, but they will appear in the coming weeks.
Concerns over Pakistan becoming the next emerging market to go into default have the country resting its hopes on China to continue to ease its payment pressure by extending loans.
Pakistan plans to repay a $300 million loan to China on Friday and another $1 billion loan will be rolled over by June 30, Bloomberg reportedquoting State Bank of Pakistan Governor Jameel Ahmad.
The rupee appears to be stable, but analysts predict volatility next month.
“Currency traders are now pricing in a weaker rupee in July. A change in guard from Ishaq Dar to caretaker government (assuming elections are announced), will leave the rupee at the mercy of demand and supply,” said Tresmark in a note.
Also, June's end is usually heavy on defence-related import payments. Swap premiums have also corrected, implying declining levels of forex liquidity in the interbank market. “If Ishaq Dar departs, the rupee will quickly succumb to the 300 level and will struggle to find a bottom,” it added.
The factor of demand and supply comes into play assuming there is some money in the kitty. The SBP’s monetary policy statement said that $3.6 billion is payable during June, of which $2.7 billion is liable for rollover. This would imply an outflow of $900 million, according to Tresmark.
The government has also budgeted a $6 billion current account deficit for the next fiscal year, which analysts believe will increase as they expect the declining trend in remittances to continue.
But even taking the government figures, they imply a deficit of $300 million to $700 million every month. “With no credible sources of inflow, the market is nervous about dollar liquidity. This will render REER [Real Effective Exchange Rate] or fair value useless till such time that liquidity constraints are removed,” the note stated.