Swap premiums plummet as banks face dollar shortage

KARACHI: Banks are facing a shortage of foreign currency, making it harder for them to provide dollars to importers to make payments, leading to low or negative swap premiums as foreign exchange reserves are depleted quickly following external funding dried up, analysts said. .

The shortage of dollar liquidity in the interbank foreign exchange market is putting pressure on the rupiah as the central bank has not provided dollars to the market to pay import bills and large imports, including oil, are entirely satisfied by the market.

“Banks are in a liquidity crunch because their nostros are running out of dollars. They have engaged in buy-sell (buy loan, sell forward) to build their nostros which, in turn, have depressed forward swaps so much that ‘they went negative,’ said Komal Mansoor, head of research at Tresmark.

Pakistan’s central bank foreign exchange reserves have fallen by $7.62 billion since January 2022. They now stand at $8.98 billion, barely enough for 1.32 months of imports.

Reserves have fallen since the stalling of a $6 billion bailout package from the International Monetary Fund.

The government has sharply raised fuel and electricity prices to release the remaining $3 billion of a current loan from the multilateral lender.

The shortage of dollars could deteriorate as the country’s trade deficit is expected to widen this fiscal year. The trade deficit increased by 58% to $43.33 billion in July-May of fiscal year 2022.

The local currency weakened by 2.38% this week. The strength of the greenback and the decline of the rupee translate into higher import bills and therefore higher inflation.

“With almost no free liquidity, it is expected that the Central Bank will not have the resources to control the market. With low levels of inflows and large outflows, especially related to late June, SBP is drawing in the share of commercial bank reserves to meet payments, resulting in low or negative swap premia,” Tresmark said in a client note.

“Although this was the case for the past 4 weeks when the rupee broke through the 190 level, some analysts appear to have raised it now. This, while not unusual, shows a severe shortage of liquidity,” a- he added.

The rupiah’s misery has been compounded by extremely low levels of foreign exchange reserves. Pakistan’s reserves fell another $234 million to close just below $15 billion. SBP’s share of the reserves is just under $9 billion and consists of $3.9 billion in gold and $4.2 billion notionally generated by buy-sell swaps (this which is not new, it has been for 3 years), he noted.

Saad Hashemy, Executive Director of BMA Capital Management, said the above [low dollar liquidity in interbank] would probably be resolved as soon as bilateral and multilateral financing would be released in agreement with the IMF.

“The country’s external deficit is fully financed by an IMF program,” Hashemy added.

The country’s finances could improve if it receives new inflows. The government must make every effort to have the IMF on board and jump the queue because the county cannot even afford another week.

The government remains engaged with the IMF this weekend and should have a green light from the IMF within a week. But the Ministry of Finance will have to tackle the main weak points in energy subsidies, fuel levies and minor areas of personal tax, subsidies to public enterprises.

The market is expecting inflows from friendly countries and multilateral lenders if IMF money comes in, revenues withheld by exporters and shippers will start to flow.

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