Rupee to remain stable despite ‘political instability’

• Uncertainty among experts about rupee’s future ahead of polls.
• Rupee exhibited range-bound behaviour throughout week.
• Currency faced pressure and declined to 289.38 earlier this week.

KARACHI: As the country remains engulfed in political turmoil following the conviction of Pakistan Tehreek-e-Insaf (PTI) Chairman Imran Khan in the Toshakhana case, analysts anticipate the rupee to remain stable against the US dollar next week, The News reported.

There is, however, uncertainty among experts regarding whether the rupee will weaken against the dollar when an interim administration assumes office ahead of the polls, expected to take place this year.

Throughout this week’s trading, the rupee exhibited range-bound behaviour. The currency faced pressure and declined to 289.38 against the dollar on Wednesday due to increased demand from importers following the easing of import restrictions.

The rupee, nevertheless, managed to recover and closed at 286.97 on Friday after ending the previous day at 286.64.

According to Prime Minister Shehbaz Sharif, the National Assembly of Pakistan will be dissolved on August 9 — three days before the end of the current five-year parliamentary term. General elections later this year will be made possible by the dissolution of the assembly.

“From an economic perspective, Pakistan has secured an IMF stand-by agreement, and related FX inflows would continue, regardless of the political situation. The USD should continue to trade close to 290 levels,” said Fahad Rauf, head of research at Ismail Iqbal Securities.

Khan, the well-liked opposition leader has been imprisoned twice so far this year.

Khan’s arrest and lengthy detention in May on suspicion of a separate case triggered major political unrest and sent the local currency to a record low versus the US dollar. Supporters and police engaged in deadly battles, and numerous military sites came under attack.

Regarding Khan’s arrest, Taurus Securities’ head of research Mustafa Mustansir, stated, “I think markets will respond to this positively because this adds clarity on the political way forward.”

He also said that the rupee would remain stable. “Similarly, expect the rupee to remain stable during the caretaker setup also. On the contrary, markets would respond negatively to any delays in general elections,” Mustansir added.

The rupee is expected to weaken against the dollar during an interim government setup, but this depreciation is anticipated to fuel higher inflation, said Tresmark, citing analysts.

“With a caretaker government scheduled to take over next week, analysts expect the rupee to weaken, but any weakening will be fuel to fire further inflation, something which everyone wants to avoid,” it said.

“Pakistan not only beat Sri Lanka in the cricket test series in style, but we also beat them at inflation (29%– 12%) and interest rates (22%– 11%) too,” it said and added that what’s more is that the undocumented siphoning of capital (through hawala/hundi) may perhaps be the biggest in recent history and unprecedented in this region, and continuously feeds the 65 to 7% premium for dollars in the black market.

If there continues to be no progress on meaningful reforms whilst administering ‘pragmatic’ solutions like burdening common people and the formal sector and increasing taxes on the salaried class, the bleeding will continue, drastically cutting the size of the economy, according to Tresmark.

In the last two weeks, we saw a lot of payments being cleared on the import side. At the same time, some defence-related payments were also cleared, it said.

The current account also appears to be headed towards surplus. The rupee on a real effective exchange rate basis continues to be significantly undervalued, it noted. “Forex reserves have stabilised and approximately $3 billion of total $4 billion capital repayments for the current quarter have been managed,” it said.

“Given these factors, it would make sense to maintain the USD-PKR parity, but it will all depend on how much heat the caretaker government can handle from the IMF,” it added.