Currency downfall – is government losing credibility? – BR Research
The anxiety in the currency market is growing again. PKR/USD after peaking at 202 in the last week, started coming back down, trailing below 200 mark after the government swallowed the bitter pill and increased petroleum prices. But once again this week, the currency started depreciating and touched a new low of Rs203 to a dollar yesterday.
This is despite the government inching towards the IMF review completion and $2.3 billion from China Development Bank is expected to arrive ‘very soon’. The issue is that the government and within it, the finance minister is losing credibility in the eyes of market participants. Market wants to see the signing off the IMF staff level agreement and the money from China to be flown in. Seeing is believing.
The actual situation on ground is not as bad as being perceived by the market. The credibility needs to be strengthened. The coalition is weak. Then there are talks of rifts between the PMLN ruling elite. That is undermining the writ of the government. Not a good omen.
Theother problem is that a few banks are finding it hard to confirm LCs from the foreign counterpart bank. The Government and SBP are pushing banks to open LCs. And banks are finding it hard to confirm without paying hefty premium. The premium used to be around 0.5-1 percent and now its as high as around 3-4 percent. Not only the value of imports is growing due to rising global energy prices but also the rate on the LCs confirming is moving up. Some foreign banks are not even entertaining the LCs. The growing risks in the country are making things complicated.
Overall inflows are fine and inline with the trend. The remittances are expected to be around $2.5-2.75 billion in May. Roshan Digital accounts (RDA) that was net outflows in April was back to net positive inflows in May and the situation is similar in June so far. The gross RDA flows increased by $189 million to $4.36 billion in May.
The issue is of payments. The government wants to end loadshedding which will push greater imports as prices are growing. And that is putting payment pressure in the market; and on top of it, LCs margins are growing too. It’s a double whammy. The government must seriously think about the country and should impose the austerity plan, rather than just talking and doing politics. Time is running out.
Having said that, the need is to emphasize that the situation is not as bad as being perceived by markets. The SBP reserves are above $9 billion. The number was lower in 2019. Yes, the quantum of imports has grown,yet, the reserves are not as low as was the case in recent past. The issue is growing international commodity prices, political uncertainty, and delay in the IMF deal.
The issue with the IMF now is on the budget. The government was showing higher GDP growth for FY23 versus what is being perceived by the IMF. The government is too ambitious. The economy is slowing down, and the growth momentum will be shaved off. And to get to the new revenue targets, new taxes are to be imposed. That part is still in negotiation. That is adding to the market anxiety. Then the inflows from China are expected to come ‘very soon’ since end April. Yet the money is not in. Finance Ministry is confident that the money will come in this week. But the market is discounting that confidence and would not relax till the money actual flows in and till the IMF 7th review is signed off. Fingers crossed.