May 14, 2024 (MLN): The Pakistani Rupee (PKR) has sustained its march on the path of stability and strength in the ongoing calendar year (2024) as the USD to PKR exchange rate has remained relatively steady.

This means that over the past 4.5 months, the domestic currency has remained resilient, experiencing only two daily drawdowns of more than 10 basis points against the mighty U.S. Dollar.

The chart below  maps out the volatility in the USD/PKR exchange rate, drawing attention to the fact that from witnessing one of its most volatile phases last year (Jan-May 2023), the currency has now entered one of its lowest volatile zones.

Average 30-day annualized volatility for the USDPKR is dead flat at 0.68 this year. That compares with an average of 12.87 last year, and 8.47 in 2022.

The performance can be further analyzed with 52-week comparison metrics, which reveals that it’s been over 8 months since the local Rupee saw its all-time low of 307.1 against the greenback.

From that respective session till date, the Pak Rupee has marked an appreciation of 10.39% or 28.9 rupees.

Moreover, both the calendar and fiscal year have seen the home currency gaining strength over USD, with an appreciation of 7.81 rupees (2.81%) and 3.68 rupees (1.32%), respectively.

The cash-strapped nation managed to recover its currency’s firmness owing to a significant number of reasons.

Pakistan’s 9-month SBA with the International Monetary Fund (IMF) emerges as one of the primary factors contributing to the resilience of PKR as it provided a policy anchor to eliminate FX shortages by returning to proper FX market functioning.

The government eliminated the multiple currency practices related to exchange rates applied to transactions with the SBP, along with all the remaining exchange restrictions resulting from the limitation on advance payments for imports.

The successful reviews following the agreement with the IMF helped build the nation’s foreign exchange reserves, by unlocking funds and opening new avenues of borrowing and rollovers through multilateral and bilateral partners.

It is crucial to note that the journey toward stability following the signing of the IMF deal mainly stems from the reforms and policies implemented by the caretaker setup, which laid the foundation for exchange rate stability.

The overall macroeconomic calm during the caretaker tenure along with a strict crackdown against speculators, hoarders, and smugglers to restrict illegal dollar outflows effectively strengthened the home currency against the USD.

In 2024, the central bank continued to play its role of imposing strict regulatory controls to ensure transparency in the forex market, by 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.

Another favorable transition for the local Rupee was observed as the real interest rates in the economy turned positive in March 2024, after a period of over 3 years.

According to a Goldman Sachs Economic Research report released back in March, PKR is nearly 20% undervalued on a 12-month horizon and positive real rates could be the catalyst needed for the Rupee's value increase.

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.

On the external front, Pakistan recorded three consecutive current account surpluses, with the March balance being the highest since February 2015.

However, the journey was not entirely advantageous for the currency as certain hardships arose 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 result was announced and as the economy progressed with the above-mentioned positive triggers, the macroeconomic condition across various segments improved, leading to stability for the Pakistani Rupee.

Outlook

IMF has flagged that the recent stability of the rupee should not lead to renewed expectations that this will persist in the future as policy slippages, together with lower external financing, could undermine the narrow path to debt sustainability and place pressure on the exchange rate.

Furthermore, a potential resurgence in Pakistan's social tensions, reflecting the complex political scene and high cost of living could weigh on policy and reform implementation.

The currency will also remain exposed to geopolitical tensions, which could drive commodity prices higher and tighten global financial conditions.

On the other hand, productive engagements with Saudi Arabia and China are expected to boost trade, cooperation, and Foreign Direct Investment (FDI) into the country, which would in turn attract Dollars into the country.

Going ahead, the central bank will remain stringent and proactive to ensure transparency in the forex market through effective monitoring.

Pakistan is currently seeking a longer and bigger loan program with the IMF and discussions are already underway. A successful conclusion of these talks would further promote macroeconomic stability and strengthen the local currency.

Copyright Mettis Link News

Posted on: 2024-05-14T17:20:36+05:00