It seems that the market (PKR/USD) is settling around 225. There is no panic today. But without envisaged inflows, the situation can get worse at any time. What happened in the last two days was sheer panictriggered by Sunday’s poll results.┬áThere was no extra pressure for payments. SBP knew the numbers and had a plan to cater, but the free fall had triggered snowballing.

How? Banks usually cover the LC payments partially and the rest is covered when they get flows. With a freefall in the currency, banks panicked. Banks rushed to cover short positions (not speculative but for the gap between usual payments). That created a snowball and a freefall in PKR. The SBP did not intervene generously to avert the freefall. With thinning reserves, SBP may become more miserable.

In the absence of SBP intervention (which would remain till reserves are built), this panic situation can happen again. The trigger could be anything, but this time it was political uncertainty following the PTI’s landslide victory in Punjab by-elections. The finance minister is saying that imports were reduced to $2.6bn in the first 18 days of July. Hence, there is no payment pressure. That is wrong. The payment pressure today is due to imports in the last two months. LCs usually retire in 3060 days.

The energy imports in June are biting us. The supposedly speedy end to load shedding has resulted in importing expensive LNG on spot and RFO at exuberant rates. Load shedding is still here with dearer dollars. The fall in imports in July is to calm the market next month or so. With panic in the last two days, inflows were stopped by exporters and remitters were waiting for the rate to settle to have maximum gains. Now, with the market settling at 225, the inflows may normalize.

The bottom line is that it is important to have $4 billion from friends and IMF board approval and it is of the utmost importance to have political stability. PDM and PTI should sit down and decide on the next election dates. Otherwise, the free fall episodes will continue.