Karachi, September 18, 2023 – Financial analysts are predicting that the Pakistani Rupee (PKR) may experience a significant depreciation, potentially falling to PKR 340 against the US Dollar (USD) by June 2024.
This projection comes despite recent administrative measures that have temporarily bolstered the local currency.
According to a report by Topline Securities, analysts estimate that the PKR/USD exchange rate in the interbank market could fluctuate within the range of Rs320-340 by June 2024.
READ MORE: PKR Gains 90 Paisas Against US Dollar: Ninth Consecutive Gain
A recent poll conducted by Topline Research among key market participants revealed varying opinions on the future of the PKR. Approximately 38 percent of respondents anticipate that the PKR/USD parity will remain in the range of Rs320-340 by June 2024. Meanwhile, 25 percent expect it to hover around Rs340-360, and 21 percent anticipate a range of Rs300-320. A smaller percentage, 12 percent, predicts it will fall below Rs300, while only 5 percent expect it to surpass Rs360.
The recent volatility in Pakistan’s currency exchange rate can be attributed to administrative measures taken by the caretaker government, which assumed power on August 14, 2023. Speculation regarding the government’s willingness to allow the PKR to adjust to market forces in line with IMF instructions led to a 6 percent decline in the interbank rate (from Rs288 to Rs307) and a 10 percent drop against the USD in the open market (from Rs296 to Rs328) from August 14, 2023, to September 4, 2023.
READ MORE: PKR Expected to Continue Upward Trajectory Against Dollar from September 18
The interbank rate applies to all foreign exchange transactions handled by banks and is primarily generated from importers, exporters, and worker remittances. In contrast, the open market, managed by regulated exchange firms, caters to foreign travelers and foreign account holders. The black market, which operates without documentation and reporting, is typically used by speculators and individuals with undeclared funds.
The surge in the USD exchange rate after August 14, 2023, was primarily driven by the open and black markets, where the premium (the difference between open market and interbank rates) increased from 1-2 percent to 6-7 percent.
In response to this trend, the caretaker government, in collaboration with the State Bank of Pakistan (SBP), implemented various measures to curb demand in the open market. These measures included:
1. Tightening security along the border to prevent currency smuggling.
2. Closure of exchange companies involved in illegal activities.
3. Directives from SBP for Category ‘B’ exchange firms and franchisees to merge with established entities or sell their businesses to stronger counterparts.
4. Raising the minimum capital requirement for exchange companies from Rs200 million to Rs500 million.
5. Encouraging banks to establish their own exchange companies.
READ MORE: State Bank Suspends Exchange Company Authorization in Ongoing Crackdown
As a result of these measures, the PKR has shown strength over the past nine working days. In the interbank market, the PKR appreciated by 4 percent, rising from Rs307 to Rs296 against the USD. In the open market, it increased by 10 percent, moving from Rs328 on September 4, 2023, to Rs298 as of September 18, 2023. Remarkably, the premium in the open market, which had reached a recent high of 7 percent or Rs23, is now nearly zero, as opposed to the historical average of 1-2 percent.
Despite this recent recovery, the PKR has faced significant challenges in recent years, with a 22 percent decline against the USD in 2022 and a 23 percent drop in 2023. Factors contributing to this decline include an external financing gap, volatile global financial markets, and local political instability, all of which have strained foreign exchange reserves.
However, the Stand-By Arrangement (SBA) reached between Pakistan and the IMF on June 30, 2023, exceeded market expectations and has led to some signs of economic and currency stability. Moving forward, the completion of the IMF review due in November 2023 will play a crucial role in shaping the local currency’s trajectory.
Other factors affecting the PKR’s value in the short term include global oil prices, USD inflows from multilateral agencies like the World Bank and Asian Development Bank, timely loan rollovers, and expected foreign direct investment (FDI) in specific sectors.
According to the State Bank of Pakistan, the total external financing requirement for FY24 is US$24.6 billion, of which US$2.8 billion has already been paid. The SBP has received commitments for rollovers worth US$8 billion, with an additional expected rollover of US$3 billion, resulting in a net payable amount of US$8 billion.
Despite expectations that the SBP would tighten monetary policy to alleviate pressure on the rupee, it surprisingly maintained the policy rate at the previous level of 22 percent during its meeting on September 14, 2023. Nevertheless, the rupee has continued to strengthen post-meeting.
As per the State Bank of Pakistan’s Real Effective Exchange Rate (REER) index, the rupee is currently undervalued. The latest REER index stands at 90.1, compared to the ten-year average of 106.7.
In conclusion, while recent administrative measures have temporarily boosted the Pakistani Rupee, the outlook remains uncertain, with analysts projecting a potential depreciation to PKR 340 against the US Dollar by June 2024. Factors such as IMF reviews, global economic conditions, and government policies will continue to influence the currency’s performance in the coming months.
