January 31, 2024 (MLN): The Pakistani Rupee (PKR) has made a positive start to 2024, closing the month of January at Rs279.5 with a gain of 0.84% or 2.36 rupees against the mighty Dollar.

The stability arises from improved macroeconomic conditions in the form of increased liquidity in the foreign exchange market due to tighter enforcement of regulations, a shrinking money supply, a balance of payments surplus on account of low import demand, and a moratorium on Chinese debt repayments.

Market sentiments received a further boost following the country receiving the second installment of SDR 528 million, equivalent to $705.6 million from the International Monetary Fund (IMF).

In December, the country recorded a current account surplus after five consecutive months of deficits, with the last reported surplus dating back to June 2023.

This development came through a boost in both the exports of goods and services, with the IT sector showcasing a major increase.

IMF Assessment and Comments on the PKR

The first review report under the Standby Arrangement published by the fund addresses the importance of allowing the exchange rate to be determined by the market, emphasizing the need for a gradual deepening of the foreign exchange (FX) market.

The Staff emphasized that deepening FX market liquidity should result in a rebound in trading volumes to levels seen some months ago and could only occur if banks are encouraged to manage FX flows via the interbank market, offering exchange rates to ensure FX flows into the system when needed.

To ensure that the exchange rate can act as a shock absorber, the IMF highlighted that the government must refrain from formal or informal restrictions.

The IMF Staff and the authorities agreed that SBP's interventions in the FX market should remain guided by the objective of building FX buffers, with sales not to be used to prevent trend depreciation of the rupee driven by fundamentals.

Meanwhile, the government agreed to redouble efforts to eliminate the existing exchange restrictions and multiple currency practices in early 2024.

The SBP's planned reforms of the EC sector could improve oversight, governance, and transparency, but further efforts to monitor the pricing in the informal exchange rate markets would helpfully identify periods of market dysfunction.

The government reaffirmed its commitment to the FX market by finalizing preparations for transitioning to a new trading platform for spot transactions connecting all banks. This system is scheduled to go live by end-January 2024.

Moreover, the government pledged to undertake a feasibility study to conduct FX purchases and sales via auctions, including the publication of auction results, by the end of March 2024.

In comparison to major currencies, PKR gained 9.16 rupees against the Euro, closing at 302.34 compared to the previous month's value of 311.5.

The British Pound became cheaper by 4.33 rupees, closing at 354.27 compared to 358.6 from a month ago.

The Swiss franc saw losses of 11.42 rupees, closing at 323.65 compared to 335.07 from the previous month.

Against the Japanese Yen, PKR gained 9.67 paisa, closing at 1.893 versus 1.9895 a month ago.

The Chinese Yuan lost 71 paisa, closing at 38.9219 against 39.63 from the previous month.

The Saudi Riyal closed at 74.53 with a loss of 63.34 paisa from its value of 75.16 a month ago.

The U.A.E Dirham decreased in value by 64.89 paisa from 76.74 a month ago to 76.094.

During the current financial year, PKR has appreciated against the Dollar by 6.49 rupees or 2.32%. While the current calendar year has seen PKR appreciated by 2.36 rupees or 0.84%.

In the Money Market, the benchmark 6-month Karachi Interbank Bid and Offer rates have dropped by 52bps to 20.72% and 20.97% this month.

Performance Summary

52 Week Performance

Outlook

The external economic factors of the country are expected to continue their support towards the home unit.

Exports are poised to persist in their upward momentum, especially IT exports due to the commendable efforts by the government. Additionally, food exports have also recorded substantial growth.

Other governmental efforts, manifested through productive visits to other countries and the signing of MoUs and agreements, are expected to yield a substantial inflow of foreign investment in the near future.

Moreover, the Special Investment Facilitation Council (SIFC)’s one-window solution would accelerate foreign investors' support and provide them with a sound environment to place their funds.

Following the country's successful acquisition of the second loan tranche from the global lender, the remaining amount under the standby agreement, $1.1 billion, is anticipated to be received after another review in February 2024.

This inflow would not only directly enhance the country’s building foreign exchange reserves but also indirectly open up new avenues for lending through multilateral and bilateral partners.

Looking ahead, workers' remittances are expected to sustain an upward trajectory with a growing number of laborers heading to countries like China and Saudi Arabia.

All these developments would increase the inflow of foreign currency, and reduce pressure on the existing reserves that would result in further strengthening of the PKR.

The State Bank's ongoing efforts, including the directive for implementing a newly introduced mechanism for end-of-day exchange rates and the establishment of registered exchange companies for banks, are expected to persist, further enhancing transparency.

In pursuit of its mandate to implement an exchange rate policy, SBP is developing a framework to monitor pricing and broader developments in informal markets and publish a report with findings by end-March 2024.

As limited reserve buffers continue to be the main constraint for durably entrenching external stability, SBP’s interventions in the FX market will remain guided by the objective of building FX buffers, with FX sales limited to episodes of disorderly market conditions and not used to prevent a trend depreciation of the rupee driven by fundamentals.

However, according to the IMF, while economic activity has stabilized, the outlook remains challenging and dependent on the implementation of sound policies.

Uncertainty arises from the political unrest arising in the nation.

The caretaker setup delivered impressive performance and placed the country on the path of stability, however, with the elections to be held in February, the outlook remains in the shadows.

What further makes the outlook for the home unit gloomy is that these inflows through different multilateral and bilateral partners are a form of debt that would have to be paid with heavy interest charges.

Similarly, the rollover of deposits from China and Saudi Arabia are just temporary joys that will have their impact sooner or later.

It is crucial to note that the auctions conducted by the central bank in the later months of 2023 witnessed a major drop in yields as market participants anticipated that interest rates have peaked.

However, a premature cut by the central bank can also deteriorate the outlook for the domestic unit.

Going forward, efficient governance, coupled with sound economic policy measures for the economy as a whole is required to ensure that the currency remains strong and resilient against the greenback.

Copyright Mettis Link News

Posted on: 2024-01-31T17:30:57+05:00