EDITORIAL: The interbank rupee-dollar parity registered at 287.85 on 14 November 2023 – a strengthening from the September 6 rate of 307.4 to the dollar but a weakening from the high of 277 rupees to the dollar on 30 October.
The reason behind the rupee’s strengthening from 7 September till 30 October is due to the successful crackdown launched on foreign exchange companies by law enforcement agencies.
Some economists, however, maintain that by late October the overarching objective of the crackdown was no longer focused on eliminating speculative activity but to reduce imported inflation – a stance that would have been opposed by the International Monetary Fund (IMF) team scheduled to begin the first review of the Stand-By Arrangement on 3 November as it was violative of the agreed condition, yet there is little doubt that the rupee began to weaken the day after the State Bank of Pakistan’s appropriate decision to disallow forward cover to exporters – a decision that was premised on the legitimate concern of depletion of the foreign exchange reserves.
Pakistan foreign exchange reserves reached a low of 4 billion dollars on 23 June, less than a month of imports, a week before the staff-level agreement on the 3 billion dollar nine-month long Stand-By Arrangement (SBA) was reached on 29 June. By 14 July, after SBA was approved by the IMF Board that also led to the disbursement of pledged assistance by friendly countries, Pakistan reserves rose to 8,727 million dollars; however, since then reserves have hovered around 7.5 billion dollars and registered 7,511.5 million dollars on 3 November.
The current year’s budget projected 6.35 trillion rupees, 21 billion dollars of loans from external sources, including 1.5 billion dollars form Eurobonds issuances, 4.6 billion dollars from commercial banks, 2.4 billion dollars from the IMF and another 2.7 billion dollars from other multilateral parties.
And while Pakistan is expected to secure the pledged financing from multilaterals and bilaterals yet as per a Moody’s report the issue would arise with respect to accessing market financing needs at affordable rates, either from Eurobonds or commercial banks in the foreseeable future - a prognosis that has since been proved to be accurate as the budgeted borrowing from these two sources has yet to materialise. The reason: international rating agencies, including Moody’s, not upgrading the country’s rating unlike their usual practice subsequent to securing an IMF package.
K Krustins, Director of sovereigns for APAC at Fitch, clarified that “Pakistan will require significant additional financing besides the IMF disbursements to meet its debt maturities and finance an economic recovery. While the IMF likely sought and received assurances of such financing, there is a risk that this could prove insufficient.”
In short, the 25 billion dollars more than the 3 billion dollars secured from the IMF required for the current year for debt repayments starting in July 2023 would be inadequate and hence that explains why Pakistan did not receive an upgrade in rating which in turn is impacting on our capacity to access market financing.
To conclude, the economy is not out of the woods yet in spite of claims to the contrary by citing a bullish stock market and a contracting current account deficit and it appears unlikely that without debt restructuring in the immediate term Pakistan will be able to meet its dollar repayments to foreign creditors.
In addition, there is also a need to restructure the ballooning domestic debt through massively slashing current expenditure, inclusive of civilian and military budgets, which necessitates voluntary sacrifice from the major recipients.
Copyright Business Recorder, 2023