Karachi, September 19, 2022 (PPI-OT): Pakistan Economy: Currency falling into the abyss

When the country received IMF’s tranche of US$1.2bn at the start of this month, the second since the start of the year, it was hoped that currency would find solid ground against the US$. However, against expectations, the currency has continued to depreciate, sliding to PkR237.5/US$ at the time of writing.

While the country’s borrowing needs for the year are fully met, the outlook beyond FY23 remains uncertain. As per the latest IMF document, the country’s gross borrowing needs over the next 5yr are expected to top US$180bn, meeting them or even rolling them over will be an uphill task.

In the short term, the country’s borrowing needs may increase further as floods devastate standing crops in Sindh and lower Punjab. Resultantly, the country will need to import various food items to fulfil local demand and therefore the import bill driven by food imports, will bloat further.

With exports likely to remain lackluster, the onus falls upon inward remittances and FDI to balance the gap between inflows and outflows. However, the remittance inflow, which has picked up of late, has remained largely disappointing. The same can be said for RDA inflows which have also started to dry up over the past few months.

The need of the hour is to increase monthly remittances and RDA inflows while stamping out currency smuggling from the country. Our models currently build a yearly depreciation of 7% – 8% over the next couple of years. However, we will be looking to revise our depreciation estimates in the coming days.

Currency continues to get hammered:

When the country received IMF’s tranche of US$1.2bn at the start of this month, the second since the start of the year, it was hoped that currency would find solid ground against US$. However, against expectations, the currency has continued to depreciate, sliding to PkR237.5/US$ at the time of writing. While the country’s borrowing needs for the year are fully met, the outlook beyond FY23 remains uncertain.

As per the latest IMF document, the country’s gross borrowing needs over the next 5yr are expected to top US$180bn, meeting them or even rolling them over will be an uphill task. Given the size of bor- rowing needs, the speculators continue to hoard the US$, effectively evaporating the liquidity from the market.

Even the short term outlook of the currency looks hazy:

In the short term, the country’s bor- rowing needs may increase further as floods devastate standing crops in Sindh and lower Pun- jab. Resultantly, the country will need to import various food items to fulfil local demand and therefore the import bill driven by food imports, will bloat further. The spread between the interbank market and open markets (both formal and grey) has continued to grow owing to the lack of liquidity. Many small companies are unable to open LCs for imports and are forced to import on the bill of lading, and the payments for those imports are being made through the black market which is mopping up the liquidity in the market even further.

Onus falls on expats to bail the country out once again:

With exports likely to remain lacklustre, the onus falls upon inward remittances and FDI to balance the gap between inflows and outflows. However, the remittance inflow, which has picked up of late, has remained largely disappointing. The previous government, in order to incentivize remittances through formal channels, had announced an incentive program for exchange companies where it would reim- burse exchange companies and banks SAR20 per transaction of US$200 or above in order to compensate them for not charging the customer.

However of late, the GOP had stopped paying which has resulted in huge receivables for exchange companies, and will start to discourage remittance inflow through formal channels as these companies begin to charge the customers. As for RDA inflows, they have also started to dry up over the past few months where the interest rates in the host nations have risen significantly, thereby reducing the attractiveness of Naya Pakistan Certificates, where the rates have not been revised.

Investment Perspective:

The need of the hour is to increase monthly remittances and RDA inflows while stamping out currency smuggling from the country. Our models currently build a yearly depreciation of 7% – 8% over the next couple of years. However, we will be looking to revise our depreciation estimates in the coming days. Weak currency will therefore continue to spoil investor sentiments on the local bourse and the market performance may remain choppy. We therefore advise our investors to maintain caution while building positions in the market