IMF hopes strengthen rupee, but next review crucial, analysts say

• Rupee closed at 277.62 per dollar on Friday.
• There was 1.43% rise in rupee over last five sessions.
• Analyst says it can continue appreciation in controlled environment. 

KARACHI: As the next crucial International Monetary Fund (IMF) review of Pakistan's next loan tranche under the stand-by agreement (SBA) inches closer, the rupee is expected to gain further strength against the US dollar, The News reported quoting analysts on Sunday.

The IMF's next review is due in November and will determine if the local currency's ongoing performance can persist for a longer period of time.

As the week began on Monday, the rupee closed at 281.65 to the dollar in the interbank market. It continued its upward surge through the week and closed at 277.62 per dollar on Friday. There was approximately 1.43% rise in the local currency over the last five sessions.

"In a controlled environment, it can continue to appreciate for some days. From a sustainability perspective, the IMF review and its stance on the rupee appreciation would be important," said Fahad Rauf, the head of research at Ismail Iqbal Securities.

The IMF is expected to review the country’s $3 billion ongoing loan programme next month. Pakistan secured $1.2 billion from the IMF in July and is expecting an additional $700 million upon the completion of the first review and release of the second tranche by December this year.

Overall, the currency has recovered 10.62%, or 29.48 rupees against the dollar in the interbank market, in the last 27 working days. On September 5, the rupee plummeted to a record low of 307.10 per dollar.

“We see the rupee strengthen slightly more over the next few days. But the key will be discussions with the IMF,” said Mustafa Mustansir, the head of research at Taurus Securities.

“We have seen some uptick in open market rates again plus gold prices also recovering slightly,” Mustansir added.

With Pakistan's central bank governor stating that the State Bank of Pakistan has met some end-of-September targets agreed with the IMF and is well-positioned to meet others, analysts said the rupee's rally appears to be sustainable in the coming week or so. This also suggests optimism that the nation will easily pass the first IMF review of the SBA.

SBP’s Governor Jameel Ahmad informed the key foreign investors on the sidelines of the IMF and World Bank meetings in Morocco that the country’s foreign exchange buffers are improving with both build-up in reserves and reduction in forward foreign exchange liabilities.

He explained that since January 2023, SBP’s foreign exchange reserves improved from a low of $3.1 billion to $7.6 billion as of the end of September 2023.

The reserve build-up was largely supported by non-debt-creating inflows amid favourable market conditions.

He said that the SBP’s forward foreign exchange liabilities have declined and the forward book target of $4.2 billion for end-September 2023 agreed with the IMF has already been met by a wide margin.

The SBP is also very comfortably placed to meet the other end-September IMF targets, including Net International Reserves (NIR) and Net Domestic Assets (NDA), he added.

Analysts and traders are of the opinion that if USD/PKR goes below 275, it will evoke panic in the industry as exporters will find it hard to export and will provide an unreasonable subsidy to importers, and that is why they expect Rupee to slow down it ascend in the coming days, according to Tresmark’s client note.

“The Rupee may trade around its July highs of 272/$ before consolidating around the 275 level. Considering our low level of reserves, highly stubborn inflation, and a manageable yet persistent CAD (current account deficit), the rupee would do well to trade in the goldilocks zone of 275-285, and the government should pause its stronger longer approach,” it said.