Rupee may depreciate further after IMF Programme

KARACHI - Pakistans currency seems to be more vulnerable and volatile against US dollar in the first quarter of new financial year (QI-FY2011) due to governments indecisiveness regarding the resumption of IMF SBA-supported programme in the country following its completion in December 2010.
It is saying that the assumed decline in capital and financial accounts and delay in pledged disbursements by the donors, will not only complicate the fiscal management, but also put a heavy pressure on external current account that will force economic managers to re-approach IMF in 2011.
The non-availability of IMF credit, coupled with low prospects of financial inflows from the other multilateral lending institutions, might create debt turmoil for the government from the beginning of forthcoming calendar year.
The SBP in its report has already asserted that the actual official flows, especially committed by the FoDP, are slightly behind schedule and thus the original $2.5 billion projected disbursements for FY10, have been revised to $1.5 billion. Thus, despite improvements in the external current account, the external sector outlook seems uncertain.
It may be recalled that Pakistan is receiving higher inflows by IMF since November 2008 with a total $7.24 billion worth SDR allocation under SBA.
Since then, the Fund is financing Pakistans macroeconomic stability program adopted by the government in Oct 2008 with an objective to narrow macroeconomic imbalances and to improve foreign exchange reserves.
At the same time, other than the IMF, net external financing, is also being continued by World Bank and Asian development Bank for the budget support by providing structural adjustment loans to the country. It includes external privatization receipts, budget assistance grants, official bilateral budget support loan and private sector sources (e.g., bonds), rescheduled government debt service and change in stock of external debt service arrears net of government debt amortization on foreign loans. Pakistan is due to get $1.2 billion worth fifth tranche from the Fund with 4.17m SDR amount.
It has become a hot debate among the countrys economic circles that what will be happened in post IMF scenario. Will the economic authorities go back to the Fund for the implementation of its lending program and its economic and financial policies another time in the country after the end of current calendar year keeping in view the expected emergence of balance of payments crisis because of facing inadequacy by State Bank in its foreign exchange reserves in 2010?
It is important to note that SBP FX as on February 18, 2010, amounted to $14.4 billion.
Some research findings are frequently showing this concern that countrys external account, SBP NFAs and its gross international reserve position will become increasingly challenging in the year 2011.
According to such reports, the emergence of any debt crisis should not be the unforeseen happening for the government as the government is bound to meet its large external debt payments, which stands at USD 4bn in FY10 and average USD 3.5bn over the next five years.
How the government would bridge the debt financing gap that will be surpassed to $11-12 billion in the upcoming 5 years, is likely to depreciate local currency further to Rs88.6 in the forex market, predicted Sayem Ali, Economic Analyst Standard Charted Bank.
He further said the rupee is facing short to medium term pressure from the exchange rate reforms as the interbank market adjusts to the large oil import payments. The central bank, constrained by its quarterly FX reserve targets and a USD 600mn Islamic bond payment that had done on 28 January 2010, is unlikely to add to onshore USD liquidity to overpass the demand-supply gap in the interbank market. Hence, we see the PKR weakening to the 85 level during Q1-2010, from 84.5 at the end of 2009. We expect the currency to weaken by 4 per cent in 2010, following depreciations of 28 per cent in 2008 and 6 per cent in 2009.
In December 2009, the State Bank of Pakistan moved to a free-floating exchange rate regime aimed at strengthening the FX reserves. Previously, the central bank had maintained a managed float regime, with the PKR effectively pegged to the USD. The key reform was the shifting of oil import payments (which totalled nearly USD 10bn or 33pc of total imports, in FY09) to the interbank market. This process was completed on 14 December 2009, when the central bank moved crude oil payments to the interbank market.
The rupee is vulnerable to more falls and we may see more depreciation in the time to come, said Syed Nabeel Iqbal, senior forex analyst.
There has been no economic progress and the economic managers have so far failed to come up with a solid economic revival plan even in two years of its service to the nation. Heavy reliance on IMF and donor countries/agencies without having a sound economic revival plan to improve inflows for the country was bound to result in the same pattern as we are witnessing today. Government is busy in addressing other issues which mainly relate to its own survival rather than those for the general public. Extremely high interest rates are creating no room for domestic business/industrial revival or expansion whereas the ongoing war on terror & worst security situation is keeping the international investors away from Pakistani ventures. Serious power shortage problems has almost halted the domestic & international trade activities, alarming increase in cost of doing business as well as cost of production is making it extremely difficult for local businesses to compete even in the regional markets, ever increasing inflation & un-employment rate, serious downfall in foreign direct investment, expected delay in inflows from donor agencies especially FODP; all these hint that rupee may depreciate further, he added.