Karachi, December 27, 2023 – Financial analysts at Topline Securities Limited have characterized 2023 as a somber year for the Pakistani Rupee (PKR), which experienced a significant 20 percent depreciation against the US dollar.
This decline comes amid ongoing challenges faced by the currency, with the PKR being under pressure for the past seven years.
The 20 percent fall in 2023 surpasses the last 5-year average depreciation of 13 percent per year and the 10-year average of 8 percent. Multiple factors, including an external financing gap, difficulties in global financial markets, and local political instability, have collectively impacted foreign exchange (FX) reserves, intensifying the pressure on the PKR.
In the first half of 2023, prior to the International Monetary Fund’s Stand By Agreement (SBA), the PKR witnessed a substantial 21 percent depreciation, dropping from Rs226 to Rs286 against the US dollar. However, a slight recovery occurred in the second half of the year, with a 1 percent gain from Rs286 to Rs282 post the IMF’s SBA.
In the open market, the PKR fell by 17 percent from Rs236 to Rs284 in 2023. Notably, the premium of the open market, which reached a high of 9 percent or Rs27 in May 2023, has now diminished, approaching zero. The government, in line with IMF Structural Benchmarks, aimed to keep the average premium between the interbank and open market rates below 1.25 percent during any consecutive 5-business day period.
The caretaker government, assuming charge on August 14, 2023, faced a challenge as speculation arose that the non-political setup might allow the currency to further depreciate. Consequently, the PKR fell by an additional 6 percent in the interbank market and 10 percent against the USD in the open market from August 14, 2023, to September 04, 2023.
Responding to this trend, the caretaker government, in collaboration with the State Bank of Pakistan (SBP), implemented measures to alleviate demand pressure in the open market. These measures included tightening border security to prevent currency smuggling, closing exchange companies involved in illegal activities, and increasing the minimum capital requirement for exchange companies from Rs200 million to Rs500 million.
As a result of these measures, the PKR gained strength in the interbank market, appreciating by 9 percent from Rs307 to Rs282 against the US dollar. Simultaneously, in the open market, the PKR increased by 16 percent, moving from Rs328 on September 04, 2023, to Rs284 as of December 27, 2023.
According to the State Bank of Pakistan’s Real Effective Exchange Rate (REER) index, the PKR is currently undervalued, standing at 98.18 in November 2023 compared to the last 10-year average of 106.6. Despite this, considering external payment risks, analysts predict the PKR/USD in the interbank market to reach Rs310 by June 2024 and Rs325 by December 2024.
Furthermore, Pakistan experienced a record-high average inflation rate of 31 percent in calendar year 2023, attributed to increased prices of food, gas, electricity, and local fuel (petrol and diesel). Responding to the rising inflation, the SBP raised the policy rate by 600 basis points from 16 percent in December 2022 to a record-high rate of 22 percent in June 2023.
Contrary to expectations, the SBP has maintained the policy rate at 22 percent since July 2023, citing positive real interest rates on a forward-looking basis. The SBP Governor, in a post-Monetary Policy Committee (MPC) meeting on December 12, 2023, highlighted that decisions regarding the policy rate would be data-driven, considering factors such as inflation, PKR movement, etc. SBP projects an average inflation for FY24 in the range of 20-22 percent, while analysts anticipate an average inflation of 23 percent in FY24 and 16 percent in calendar year 2024.
T-Bills yields in 2023 increased by 415-439 basis points, with rates now standing at 21.08 percent, 21.38 percent, and 21.15 percent for 3, 6, and 12 months, respectively. In the last three months, yields have decreased by 270-358 basis points from their peak in September 2023, indicating market anticipation of a policy rate cut in 2024. Similarly, the yield on 3-year Pakistan Investment Bonds (PIBs) increased by 92 basis points to 16.56 percent in 2023 but has since decreased from its peak of 21.16 percent in September 2023.
Considering the expected decline in inflation, analysts predict a 700 basis points cut in the policy rate in 2024, reducing it from the current 22 percent to 15 percent. The coming year holds the promise of potential policy shifts to stabilize the economy and restore confidence in the Pakistani Rupee.
