The Pakistani Rupee (PKR) is expected to face further decline against the US dollar in the upcoming week, commencing on November 6, 2023.
This trend of depreciation is primarily attributed to ongoing discussions between Pakistani authorities and the International Monetary Fund (IMF), as well as an increase in imports.
Historically, the Pakistani rupee tends to exhibit heightened volatility during visits by the International Monetary Fund’s review missions to Pakistan. The current situation is no exception, and it is anticipated that the rupee’s downward trajectory will persist.
The IMF delegation has initiated talks with Pakistani authorities to review the country’s $3 billion loan program, with negotiations scheduled to conclude on November 15, spanning a 14-day duration. The successful outcome of these negotiations would enable Pakistan to secure a second loan tranche of approximately $700 million from the global lender. Back in July, Pakistan received its first tranche of $1.2 billion under the standby arrangement.
Over the past five sessions in the interbank market, the Pakistani rupee has depreciated by 1.19 percent, equivalent to PKR 3.36, against the US dollar. The rupee closed at 280.95 against the dollar on Monday but experienced further decline, concluding the week at PKR 284.31.
Currency dealers have expressed concerns that the rupee may continue to be under pressure throughout the coming week, largely due to reduced availability of US dollars resulting from import payments. At the same time, inflows of dollars from exporters have significantly slowed down. This is primarily because a substantial portion of export earnings is being utilized to offset export forwards executed earlier, particularly in light of the recent crackdown on the foreign exchange market.
One notable development is that the banking sector appears to have been restricted from financing their nostros through buy-sell swaps, leading to the emergence of forward premiums. Importers are consequently facing a wider spread in order to process their payments amid a scarcity of dollar liquidity.
October brought some positive news on the economic front, as exports reached $2.7 billion, marking the highest level for the year. This boost in exports occurred as the consumer price index inflation (CPI) significantly receded from 31.4 percent to 26.9 percent. This reduction in inflation is a positive sign for policymakers who have resisted the urge to raise interest rates on multiple occasions. Their resilience has contributed to a stronger rupee, defying market expectations.
Additionally, the fall in the CPI has led to a decrease in the Karachi Interbank Offered Rate, which has dropped from its peak of 24.46 percent on September 13 to 21.68 percent as of November 3. This indicates the market’s consensus that interest rates have likely reached their peak in the short to medium-term.
As Pakistan navigates these economic challenges, all eyes will remain on the ongoing discussions with the IMF and the potential impact on the rupee’s exchange rate against the US dollar. The outcome of these negotiations and the evolving economic landscape will play a crucial role in determining the future trajectory of the Pakistani currency.