Rupee rebounds after Saudi Arabia pledges $4.2 billion to support economy

KARACHI: Rupee recovered on Wednesday to gain 1.44 percent against dollar after Saudi Arabia approved a $4.2 billion financial support package for Pakistan to help ease pressure on country’s balance of payments and economic recovery, traders and analysts said.

Rupee posted its first gain in more than three weeks, pulling back from the record low hit in the previous session as the Prime Minister Imran Khan succeeded to secure funding from Saudi Arabia at the time when the final announcement was still awaited from the government and the International Monetary Fund about the outcome of the discussions for the resumption of its $6 billion Extended Fund Facility (EFF).

In the interbank market, the rupee closed at 172.78 after hitting an all-time low of 175.27/dollar on Monday. The local unit rose by Rs2.48 against the greenback, the highest day-on-day recovery rupee has seen after April 2020.

Rupee has shed 7.49 percent versus the dollar so far this year. It slumped 11.86 percent since its recent peak in May, and down 8.82 percent fiscal year till date.

Rupee gained Rs2.20 to close at 174.20 to the dollar in the open market.

The Saudi Fund for Development announced it would deposit $3 billion in Pakistan’s central bank. The financial package also includes $1.2 billion worth of oil supplies on deferred payments during the year.

Investors became bullish on the rupee as the country’s external account prospects improved in tandem with bright chances of receiving the IMF’s loan tranche.

“Sentiments on the domestic currency turned positive in anticipation of the narrowing gap between the inflow and the outflow of dollars,” said a forex dealer.

“The Saudi $3 billion cash deposits with the State Bank of Pakistan will shore up the country’s foreign exchange reserves and the deferred oil payment facility to reduce pressure on the import bill, especially given the higher global commodity prices,” he added.

Shaukat Tarin, Adviser to Prime Minister on Finance, told media on Wednesday Pakistan was soon to finalise the staff-level agreement with the IMF under the EFF.

Tarin said the talks with the fund would conclude in a day or two, adding that support from Saudi Arabia would also increase the foreign exchange reserves by $3 billion.

Foreign reserves held by the State Bank of Pakistan dropped $1.646 billion to $17.492 billion as of October 15 due to external debt repayments including the payment against the international sukuk. Analysts expect the rupee to appreciate to 170 level in the coming days. “Going forward, with the likely resumption of the IMF programme the currency is expected to strengthen further in the short-term,” said Tahir Abbas, the head of research at Arif Habib Limited.

The Real Effective Exchange Rate (REER) index fell to 95.9 in September, depreciating by 0.7 percent compared with the last month. The REER has depreciated by 4 percent since the beginning of FY2022. Analysts see the declining trend in the REER as an indication of a strong rupee. The rupee was under pressure because of the surging current account deficit amid a spike in imports.

The withdrawal of the support by the SBP was assumed by analysts who thought this pointed to one of the IMF preconditions. Rupee touched 174-175 versus dollar in seven sessions, but there was neither verbal intervention nor any liquidity injection in the market.

The depreciation of rupee stoked the inflationary pressures and the government raised electricity and fuel prices. The higher energy costs could increase inflation further.

In the absence of the IMF nod, Pakistan was hunting for more external financing to arrest the widening current account deficit, which swelled to $3.4 billion in the first quarter of this fiscal year from $2.5 billion a year ago. The current account gap is expected to widen to $10-11 billion or 3-3.5 percent of GDP in FY2022.