By : Shahzada Ahsan Ashraf
There are many real-life ‘odds-defying’ moments, and one unfolding in real-time is the story of the Rupee. In the last month, the Rupee has strengthened by more than Rs.3/$, closing at 282.50 against all odds.
A significant reason for this is the State Bank of Pakistan’s (SBP) implementation of a zero Current Account Deficit (CAD) policy, prompting banks to rigorously align outflows with inflows. As a result, the current account for the last month showed mild positivity.
Although reserves have been impacted due to debt servicing and repayments, they have largely remained stable, hovering around $12 billion, slightly down from its peak of $12.9 billion in July, despite a $1.16 billion CAD in the last five months.
This practice of maintaining a zero CAD comes at a substantial cost, namely zero GDP growth. However, the current setup prioritizes stability over growth while attempting to mitigate inflation.
Forex Obligations
The Forex obligations of $24 billion are a cause for concern, with approximately $6 billion constituting a funding gap (factoring in repayments, roll-overs, and known bilateral & multilateral commitments) for the next 7 months. Given the difficulty in raising funds from international markets, this poses a severe ongoing challenge.
SWAP Premiums
The SBP has managed to support swap premiums and is presumably engaging in sell/buy swaps in the markets at the behest of the IMF. This is evident in SBP’s liquidity profile, where net short positions have reduced from $4.5 billion (June) to $2.9 billion (Oct).
Currency Ideas
With premiums remaining robust, some exporters are booking proceeds up to the end of January, anticipating a stable outlook for USDPKR. Notably, they are avoiding the election months and the potential change in governments and policies thereafter.
USDPKR seems to be stabilizing around the 282 mark for another month or so. This cautiously optimistic outlook is contingent on IMF approval, contained inflation, and consequently, Real Effective Exchange Rate (REER) stability, along with political stability.
PSX
The KSE100 is currently experiencing a downturn, losing about 5,000 points in the last seven sessions. Interest rate cuts act like steroids for the stock market, and as soon as investors realized that high-interest rates will persist longer than expected, sentiment changed. Investors have adjusted their rate cut expectations from the current month to at least the end of April – a setback for leveraged positions that haven’t seen any fresh liquidity.
Analysts have cited various reasons for the sharp correction, including profit-taking, hitting stop losses, margin calls, and concerns over political instability related to upcoming corrections. Some even argue that the entire rally and anti-rally were cases of pump and dump manipulation.
Fed Rate Cuts
Markets are growing confident that the Federal Reserve will initiate interest rate cuts in 2024. The first cut is anticipated at the March 20 monetary policy meeting. While the market expects six rate cuts in 2024, astute traders are factoring in only three rate cuts.
(The writer is a Former Chairman and Managing Director PIA, Former Federal Minister of industries and production)
