KARACHI: Rupee traded at a record low of 77.45 to the dollar on Wednesday due to heavy oil payments and an economic situation so dire that bankers hope the 5-month-old civilian government will seek IMF support.
The rupee steadied by the close, amid unconfirmed reports of central bank dollar sales, and ended little changed from Tuesday at 76.90/77.00.
The rupee has lost more than 20 per cent against the dollar this year, and foreign currency reserves have fallen sharply due to a deteriorating balance of payments position.
The slide has raised fears of a sovereign default in six months time, Citibank economist Mushtaq Khan said in a research note circulated on Tuesday that advocated Pakistan should turn to the International Monetary Fund.
“With a $500 million repayment of the 2009 Eurobond this February, markets are factoring in a significant risk of sovereign default,” Khan said. He saw measures to stifle imports and the proposed deferral of Pakistani payments to Saudi Arabia for oil imports helping to stabilise the rupee, but investors needed more clarity on the strategy for handling the balance of payments deficit.
Khan wrote: “An IMF programme would bring additional funding policy consistency and discipline” and “political resistance to the IMF may be overcome as the economic slide continues”. Pakistan’s economy is in tatters due to the impact of high oil and food prices, while investors have been frightened off by policy inaction stemming from a lengthy period of political instability stretching back to early 2007.
“They need to restore the confidence of the foreign investors. There is no short-term remedy for this,” said Sayem Ali, an economist at Standered Chartered.
“But if they can get the letter of comfort from the IMF, that is the best thing that can happen right now.”
Inflation has soared to nearly 25 per cent, the trade and fiscal deficits are widening, and the central bank has pleaded with the government to cut its borrowing. In late July, the bank raised its key discount rate to 13 per cent from 12 per cent.
To reduce the trade deficit, the central bank imposed a 100 per cent cash margin on the import of luxury and other non-essential products. The margin had been 35 per cent.
Foreign reserves fell almost $200 million in the weekending on Aug 23 to $9.38 billion, representing less than three months import cover, having slid from a record high of $16.5 billion in October last year.
The IMF could insist on more unpopular measures to put finances in order, though the government has already cut fuel subsidies. “The IMF may bring up-front pain … but it also includes a published macroeconomic framework, second-generation reforms, and policy coordination within Pakistan and with international donors/financiers,” Citibank’s Khan said.
Pakistan is in talks with Saudi Arabia to defer an estimated $5.9 billion worth of oil payments, and is also in discussions with the World Bank and Asian Development Bank (ADB) for more than $1 billion in loans.
The ADB is due to release $500 million to Pakistan this month as part of a $1.3 billion loan programme that can be used for budgetary support, a Finance Ministry official said last week.
Source: The News, 4th September, 2008