Karachi, September 22, 2024 – The stability of the Pakistani rupee against the US dollar in the coming week largely depends on the approval of a $7 billion loan by the International Monetary Fund’s (IMF) executive board.
The IMF board is scheduled to meet on September 25 to discuss the new 37-month Extended Fund Facility (EFF) arrangement with Pakistan, which was agreed upon in July 2024. This follows the successful implementation of a nine-month standby arrangement from 2023. Approval of this new facility is critical for Pakistan’s economic stability, especially in terms of its currency value against the dollar.
In the interbank market, the rupee has shown some gains against the dollar during the past week. The local currency started at 278.12 per dollar on Monday and closed slightly higher at 277.83 by Friday. Despite this improvement, market activity has been sluggish due to uncertainty surrounding the IMF deal. Traders and exporters have been hesitant to sell dollars forward, which has been compounded by a sharp drop in forward premiums. However, there is optimism that activity will increase as the IMF board meeting approaches.
Market expectations suggest that the rupee will remain within a stable range for now. Several factors are contributing to this relative stability: foreign reserves are on the rise, remittances are performing well, and the real effective exchange rate (REER) has been declining. Additionally, the market is currently comfortable with surplus dollar liquidity, which is expected to improve further with the anticipated approval of the IMF loan.
As of September 13, Pakistan’s foreign exchange reserves held by the central bank rose by $43 million to $9.51 billion. Meanwhile, remittances have increased significantly, reaching $2.9 billion in August, a 40% rise compared to the same period last year. In the first two months of the fiscal year (July-August FY25), remittances totaled $5.9 billion, up 44% from the previous year. Despite this strong performance, remittances fell slightly by 2% on a month-to-month basis in August.
Projections from financial analysts suggest that the rupee could trade at around 282 per dollar by the end of 2024. Additionally, there are predictions that interest rates could drop to 14%, and oil prices might fall below $60 per barrel within the next six to twelve months. However, these forecasts carry considerable risks due to evolving global economic and geopolitical factors.
Rising geopolitical tensions, particularly the possibility of conflict between Israel and Hezbollah in Lebanon, could have wide-reaching economic consequences. Furthermore, the ongoing Russia-Ukraine war continues to create uncertainty in global markets, potentially impacting safe-haven assets like gold and oil. On the global economic front, the US Federal Reserve has made a jumbo 50 basis points (bps) rate cut, which led to the US dollar index dropping below the 100 level, its lowest point this year. Global growth is also projected to slow to 2.9% due to weaker performance in major economies.
Pakistan’s domestic challenges further complicate the outlook. The country’s GDP growth is unlikely to exceed the expected 3.5% this fiscal year due to structural issues, political instability, and poor agricultural output. Long-term interest rates have also decreased, with 10-year bonds trading at 12.87% compared to 12.1% the previous week. A rejected Treasury bill auction and verbal interventions have contributed to expectations of faster declines in interest rates.
The approval of the IMF loan is seen as crucial for stabilizing the rupee and addressing the country’s broader economic challenges.
