If Karachi stocks market is any criterion, the approval of Wednesday’s $ 6.64 billion Extended Fund Facility (EFF) by the International Monetary Fund (IMF) provided the country’s dollar-hungry economic mangers with the much-needed breather to revive the ailing economy.
The IMF bailout came as the cash-strapped country’s dollar reserves have contracted to what the Fund said a critical level and its currency breaking all the previous records by devaluing to Rs 104.90, that too on the interbank market.
The State Bank Thursday reported that up to Aug 30 it reserved foreign exchange worth only $ 4.8 billion, even lesser than $ 5.175 billion possessed by the commercial banks.
According to currency dealers, the rupee Thursday traded against the greenback at Rs 104.79 and Rs 104.70 on the open and interbank markets, respectively.
“The IMF package would end the panic buying by the importers caused by six-month forward booking by the banks,” opined Malik Bostan, chairman Exchange Companies Association of Pakistan (ECAP).
Terming the development as welcoming, the money exchanger said rupee, like other regional currencies, had depreciated against the dollar by five percent since the dissolution of PPP-dominated assemblies. “This huge forward booking coupled with other factors devalued the rupee to Rs 105 from Rs 99 in the previous government’s tenure” Bostan said.
He, however, added that the currency devaluation was a regional trend as Indian rupee had lost 15 percent value to the strengthening US currency. The IMF help, the rupee dealer said, should strengthen the rupee by Rs 100 as the exporters were expecting.
Referring to the IMF estimates, an economist, however, said the rupee would further devalue, at least by Rs 110 in coming months. The Fund estimates show that baseline for the real effective exchange rate for Pak currency during FY14 would be negative 4.8 percent. The same would further deteriorate up to negative 7.7 percent under the IMF program.
“The conditions (on ground) are not hinting at appreciation,” the analyst said.
The IMF, in its survey, too foresees a long-term indirect impact on Pakistan’s exchange rate saying the bailout was primarily aimed at macroeconomic stabilization namely slashing the budget deficit and reversing the balance of payments problems.
“The financial support from the IMF and other international partners will help Pakistan overcome the balance of payment difficulties by stabilising foreign exchange reserves and relieving pressure on the currency,” said Jeffrey Franks, IMF’s mission chief for Pakistan, in a survey.
The rupee whereas is bracing for a long-term impact on its value, the country’s vibrant equity market was quick to respond positively on the very next day the international lender okayed the package, to be disbursed in tranches over next three years after quarterly reviews. The first disbursement would be of $540 million.
The benchmark KSE 100-share index skyrocketed by 575.63 points or 2.63 percent to close at 22,451.46 points compared to Wednesday’s 21,875.83 points.
The free-float KSE 30 index too gained 477.33 points or 2.81 percent to close at 17,485.53 points.
“Pakistan stocks closed bullish in stocks across the board after IMF approval for $6.7 billion loan for economic reforms,” viewed Ashen Mehanti, a senior equity analyst.
The federal cabinet’s decision Wednesday for ‘targeted action’ to restore peace in the city and the resultant easing political concerns was another factor that, the analyst said, boosted the investors’ confidence at the KSE.
Also, the analysts believe, the statements from the IMF and the government of Pakistan, in its Letter of Intent to the Fund, eased the investors’ fear on a possible monetary policy tightening by the State Bank which was widely expected to up the discount rate by at least 50bps given burgeoning inflationary pressures.
Mehanti said: “Easing fears for announcements on Sep 13 regarding major change in the SBP policy rate after (the) CPI (inflation) stood below expectations at 8.55 percent this August played a catalyst role in bullish activity amid higher trades.”
The central bank is now expected to maintain status quo by keeping the cost of borrowing at 9 percent for next couple of months.
“The focus of the policy makers would once again be on promoting investment,” said Nauman Khan of Shajar Research.
The IMF’s fresh billions, however, would only serve their purpose if Islamabad carried out bold structural reforms especially in energy sector.
Otherwise, this one too would become half-paid, like most of IMF’s previous packages.
Topline analyst Zeeshan Afzal recalled that during last 25 years, Pakistan had entered into 10 IMF programs. “Most of the arrangements were not fully implemented due to inability to bring structural reforms,” he said.
Out of total agreed amount, Pakistan had withdrawn only SDR 7.0 billion. “This is 76 percent of the committed funds,” Afzal said.
The analyst said if the government introduced the required reforms properly, one cannot rule out improvement in Pakistan’s credit rating outlook.
Franks, Bostan and Afzal are upbeat that the IMF’s endorsement would help the dollar-hungry Islamabad receive more financial inflows from other international agencies such as World Bank, Asian Development Bank, Islamic Development Bank etc.
