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Mettis Global News
Mettis Global News

CPI Preview: Inflation to fall below 14% YoY in May

PKR defies odds, keeps Dollar at bay for 4th consecutive month

PKR defies odds
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March 31, 2024 (MLN): The Pakistani Rupee (PKR) has demonstrated resilience against the mighty Dollar for a prolonged period as the currency concluded March as its fourth consecutive monthly victory.

The USDPKR exchange dropped to 277.95 by the end of the month, around 1.16 rupees or 0.42% lower than the quoted closing rate of 279.11 in February.

Despite the successful conclusion over the review month, certain hardships arose for the domestic unit due to uncertainty surrounding the delays in the election outcome.

The instability regarding the new government's formation created a state of confusion for the economy, resulting in the PKR losing its stable position against the US Dollar, which was maintained over a significant period.

However, as soon as the election results were announced the Pakistani Rupee took a breather and continued its front-foot journey against USD.

It is crucial to note that the positive closure is primarily associated with the successful staff-level agreement with the International Monetary Fund (IMF) for access to SDR 828 million, equivalent to around $1.1 billion.

The home unit stood strong in light of this development as this inflow would boost the cash-strapped nation’s foreign exchange reserves and indirectly open up new avenues for lending through multilateral and bilateral partners.

Furthermore, the strong regulatory controls introduced by the State Bank of Pakistan (SBP) played their role in restricting illegal dollar outflows, revoking licenses of exchange companies and penalizing banks found breaching the code of conduct.

Progress was also noted in the development of various exchange companies of listed banks, as the majority of them received operational licenses from the central bank.

To ensure an adequate supply of cash Dollars in the open market, the central bank even raised the validity of allowing Exchange Companies (ECs) to import cash US Dollars up to 50% of the value of their export consignments by another 6 months.

The massive disparity between the interbank and open market rates has been a major concern for the country. However, following the robust crackdown and policy controls, this gap has shrunk well below the standard limit of 1.25% as suggested by the IMF.

In the second half of the review month, the forex market also witnessed exporters selling Dollars in forward, which led to a drop in premiums and strengthened the domestic currency against the mighty greenback.

Over the month, the State Bank also unveiled the data for the macroeconomic components for February which also showed improved diverse performance.

Pak Rupee's Real Effective Exchange Rate Index (REER) increased to a provisional value of 102.17, the highest since May 2021.

Additionally, the current account balance of the nation also turned positive to $128 million in February.

The leading global investment banking management firm, Goldman Sachs remarked that the PKR is nearly 20% undervalued on a 12-month horizon and offers about 26% nominal carry.

The Goldman Sachs Economic Research report further suggested that positive real rates could be the catalyst needed for the Rupee's value increase, provided inflation rates begin to decline.

Real interest rates have remained negative for a period of over 3 years, as inflation in the economy has been on an escalating trend.

The IMF has also stressed the need to turn real interest rates positive by taking all necessary measures to combat inflation.

As a consequence, the State Bank raised the policy rate to a record high of 22% in June 2023 and since then it has maintained this rate for six consecutive meetings.

Incorporating the high base effect, the consumer price index (CPI) in February 2024 slowed to a 20-month low of 23.1% YoY, compared to 28.34% YoY in the last month and 31.5% YoY in February 2023.

This hints that the real interest rates in the economy are likely to turn positive, given the signs of slowing inflation.

Analyzing further, PKR has appreciated against the Dollar by 8.04 rupees or 2.89% during the current financial year. While the current calendar year has seen PKR appreciate by 3.91 rupees or 1.41%.

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Posted on: 2024-03-31T11:05:04+05:00