Rupee routs as IMF loan likely hits snags

Erum Zaidi
Wednesday, Jul 06, 2022

KARACHI: The rupee fell on Tuesday, wiping out gains from the previous four sessions as demand for the dollar increased ahead of the Eidul Azha holidays and was buffeted by concerns of a delay in the IMF loan programme, dealers and analysts said.

The stakeholders fear the Punjab government’s provision of power subsidies to the poor consumers could jeopardise Islamabad’s progress made towards unlocking the suspended bailout

In the interbank market, the rupee closed at 206.94/dollar versus 204.56 on Monday. The local unit weakened 2.38 rupees or 1.15 percent during the session.

The domestic currency lost two rupees to settle at 205 against the dollar in the kerb market.

“The rupee erased previous sessions’ gains tracking the importers’ dollar demand due to long holidays for Eid,” said a currency dealer.

The markets will be shut from Friday to Tuesday for Eidul Azha.

The sentiment was shaken suddenly by reports that Punjab Chief Minister (CM) Hamza Shehbaz Sharif will provide about nine million poor families 100 units of electricity free of cost on a monthly basis. This politically-motivated statement, mainly ahead of Punjab CM's reelection on July 22, is in contravention of the IMF loan conditions. This compounded doubts over whether the combined seventh and eighth reviews on the Extended Fund Facility could be completed.

“The uncertainty is emerging once again with respect to the IMF programme while the Punjab government announcement of power subsidies is creating pressure in the currency market,” said Tahir Abbas, the head of research at Arif Habib Limited.

The government is trying to fulfill the lender’s tough terms to reclaim the $6 billion loan facility, but reports claim the IMF programme was in a holdup due to an alleged impasse over anti-corruption regulations.

Finance Minister Miftah Ismail denied this news, saying, “the IMF programme is on track”. His clarification failed to calm the market down.

On June 28, Pakistan received economic and financial targets from the IMF that once agreed and approved could pave the way for a staff-level agreement with the Fund.

Prior actions required by the Memorandum of Economic and Fiscal Policies (MEFP) include passing the federal budget that was agreed upon with the IMF and presented to the National Assembly on June 24 as well as presenting a memorandum of understanding that has been duly signed by the provincial governments and binds them to contribute a combined Rs750 billion cash surplus to the federal government.

The rupee had been under pressure because of falling forex reserves and the widening of the current account deficit. It hit an all-time low closing of 209.96 to the dollar on June 20.

“The rupee should settle around these levels given REER [real effective exchange rate which was last reported well under 100,” said Saad Hashemy, the executive director at BMA Capital Management.