Pakistan Economy – Pak Rupee: Recent gain & outlook

Pakistan’s currency has once again made headlines, but this time it’s due to administrative measures that have resulted in the PKR gaining value in both the official interbank market and the open market. Ever since the caretaker government took charge on August 14, 2023, in Pakistan, the PKR came under pressure amid speculation that the non-political caretaker setup might allow the currency to adjust to market forces in line with IMF instructions. As a result, the PKR fell 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 interbank rate applies to all foreign exchange receipts and payments handled by Banks and is mainly generated from importers, exporters and worker remittances. The open market is managed by regulated Exchange firms that fulfil the demand and supply of foreign travelers, foreign account holders, etc. In Black market no documentation takes place and is not reported. Usually used by speculators, people having undeclared money, Smugglers, etc.

The recent 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 6-7%.

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;

Tightened security along the border to prevent currency smuggling.

Closure of exchange companies involved in illegal activities.

Directives from SBP for category ‘B’ exchange firms and franchisees to either merge with established full-fledged entities or sell their businesses to stronger counterparts.

An increase in the minimum capital requirement from Rs200mn to Rs500mn for exchange companies.

Encourage banks to establish their own exchange companies.

As a result of these measures, we have witnessed the PKR gaining strength over the last 9 working days. In the interbank market, the PKR has appreciated by 4%, rising from Rs307 to Rs296 against the USD. Meanwhile, in the open market, the PKR has increased by 10% from Rs328 on Sep 04, 2023 to Rs298 as of Sep 18, 2023.

Interestingly, the premium of open market that reached recent high of 7% or Rs23 is now almost close to zero. In the past it has remained 1-2% on an average. And as per recent 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.

PKR has been one of the worst performer in the last few years. PKR fell 22% in 2022 while in 2023 it is down 23% so far against USD in spite of recent recovery.

External financing gap, challenging global financial markets, and local political instability has badly affected foreign exchange reserves (currently less than 2 month import cover) and build pressure on rupee.

However, on June 30, 2023, Pakistan reached a Stand-By Arrangement (SBA) with the IMF which was better than market expectations. Since then, some signs of economic and currency stability have been observed.

Going forward, in the short run, besides these administrative steps completion of IMF review due in Nov 2023 will be an important driver of local currency.

Moreover, Global oil prices, USD inflows from multilateral agencies like World Bank and Asian Development Banks, timely rollover of maturing loan and expected FDI in few sectors will be other factors determining the value of PKR.

SBP Governor in post MPC meeting stated that total external financing requirement for FY24 is US$24.6bn out of which US$2.8bn has already been paid. According to him SBP has received commitments for rollovers worth US$8bn, with an additional expectation of US$3bn to be rolled over. The net payable amount stands at US$8bn.

There was expectation that SBP will tighten monetary policy to curtail pressure on rupee. However surprisingly SBP kept the policy rate at previous level of 22% in its meeting on Sep 14, 2023 and in spite of that rupee keep on strengthening post monetary policy meeting.

As per SBP’s Real Effective Exchange Rate (REER) index, rupee is undervalued. The latest REER index published by the SBP stands at 90.1, compared to the last 10-year average of 106.7.

Based on a recent Poll of key market participants conducted by Topline Research, 38% of the participants anticipate PKR/USD parity to range in Rs320-340 by June 2024. Around 25% expect it to be around Rs340-360 while 21% expect it to be around Rs300-320. On other hand, 12% expect it to be below Rs300, while 5% expect it to be above Rs360.

We also expect PKR/USD in interbank market to be in range of Rs320-340 by Jun-2024.

CCourtesy – Topline Research



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