§ Pak Rupee (PKR) has been under pressure since last 7-Years. In 2023 PKR fell 20% against US$ in spite of some recovery in last few months.
§ This 20% fall in 2023 is higher than last 5-Year average fall of 13% a year and 10-Year average of 8%.
§ External financing gap, challenging global financial markets, and local political instability has badly affected foreign exchange (FX) reserves and build pressure on PKR.
§ In 1H2023, before the IMF’s Stand By Agreement (SBA), PKR fell by 21% from Rs226 to Rs286 against US$, whereas in 2H2023, it gained 1% from Rs286 to Rs282 post IMF’s SBA.
§ In the open market, PKR fell 17% from Rs236 to Rs284 in 2023. In 1H2023, it declined by 19% to Rs236 to Rs290, while in 2H2023, PKR gained 2% from Rs290 to Rs284 against the US$.
§ Interestingly, the premium of open market that reached high of 9% or Rs27 in May-2023 is now almost close to zero. In the past it has remained 1-2% on an average. And as per IMF Structural Benchmark, the government was asked that the average premium between the interbank and open market rate will be no more than 1.25% during any consecutive 5 business day period.
§ When caretaker government took charge on August 14, 2023, the PKR came further under pressure amid speculation that the non-political caretaker setup might allow the currency to fall. As a result, PKR fell further by 6% (from Rs288 to Rs307) in the interbank market, while it plummeted by 10% (from Rs296 to Rs328) against the USD in the open market from August 14, 2023 to Sep 04, 2023.
§ The rally in USD after August 14, 2023 was mainly driven by open and black market where the premium (open market vs interbank rate) increased from 1-2% to 8-9%.
§ Considering this trend, the caretaker government, along with the State Bank of Pakistan (SBP), took several measures to cool down the demand in the open market. The measures included (1) tightened security along the border to prevent currency smuggling, (2) closure of exchange companies involved in illegal activities, and (3) increase in the minimum capital requirement from Rs200mn to Rs500mn for exchange companies.
§ As a result of these measures, PKR has gained strength in the interbank market, appreciating by 9% from Rs307 to Rs282 against the US$. Meanwhile, in the open market, the PKR has increased by 16%, moving from Rs328 on Sep 04, 2023, to Rs284 as of Dec 27, 2023.
§ As per SBP’s Real Effective Exchange Rate (REER) index, PKR is undervalued. The latest Nov-2023 REER index published by the SBP stands at 98.18 vs last 10-year average of 106.6.
§ Considering Pakistan external payment risk and other factors, we expect PKR/USD in interbank market to reach Rs310 by Jun-2024 and Rs325 by Dec-2024.
§ Pakistan witnessed a record-high average inflation rate of 31% in calendar year 2023 primarily due to increase in prices of Food, Gas, Electricity, and local fuel (Petrol and Diesel).
§ With the rising inflation trend, SBP increased the policy rate by 600bps from 16% in Dec-2022 to a record-high rate of 22% in Jun-2023.
§ There was expectation that SBP will further tighten monetary policy to curtail inflation and manage rupee. However since Jul-2023, the SBP has kept the policy rate unchanged at 22%, citing positive real interest rates on a forward-looking basis. This decision is grounded in the expectation that inflation will decline significantly in 2HFY24 due to contained aggregate demand, easing supply constraints, moderation in international commodity prices, and a favorable base effect.
§ SBP Governor in post MPC meeting on Dec 12, 2023 highlighted that the decision to reduce the policy rate will be data driven, such as inflation, PKR movement, etc.
§ SBP projected an average inflation for FY24 in the range of 20-22% while we anticipate that the average inflation for FY24 will be 23% and 16% in calander year 2024.
§ T-Bills yields in 2023 increased by 415-439bps with rates now standing at 21.08%, 21.38%, and 21.15% for 3, 6, and 12 months, respectively. However, in the last 3 months, yields have declined by 270-358bps from its peak in Sep-2023, indicating that market participants are anticipating a policy rate cut in 2024.
§ Similarly yield on 3-Years Pakistan Investment Bonds (PIBs) increased by 92bps to 16.56% in 2023, but it has also decreased from its peak of 21.16% in Sep-2023.
§ Considering expected decline in inflation numbers, we expect 700bps cut in the policy rate in 2024, reducing it from the current 22% to 15%.
Courtesy – Topline Pakistan Research
