December 29, 2023 (MLN): The Pakistani rupee (PKR) concludes 2023 as one of Asia’s worst-performing currencies, plummeting by 55.43 rupees or 19.67% against the US Dollar.

This is far worse than the 5-year average depreciation of 12.92% and 10-year average depreciation of 8.95%.

In the previous calendar year, the home unit had depreciated by 49.9 rupees or 22.05% against the USD.

The key factors that exerted pressure on the local currency throughout the year were the high debt payments, depletion of foreign exchange reserves, increased profit repatriation, political instability, and soaring inflation.

High debt obligations continued to create an external funding gap.

By the end of the first half of the year, the country managed to clinch a $3 billion loan program from the International Monetary (IMF) that helped the cash-strapped nation from a sovereign debt default.

Total external financing requirements for FY24 were a staggering $24.6bn. Out of this amount, $5.4bn has been paid out while $12.4bn was rolled over, of which $9bn has been committed.

Even with this rollover, the net principal payable in FY24 stands at $4.3bn.

On the funding front, the existing foreign exchange reserves stand at only about $7.76bn.

With more current account pressures, this can create a funding gap putting more pressure on the PKR.

Moreover, the IMF estimates that the country's external financing requirements will average $30bn every year between fiscal 2025 and 2028.

Thus, the external funding gap would require more aid for the fragile economy to meet its high debt obligations.

Hopes Of Better Economic Conditions

The current account position of the country has improved significantly in 2023.

In 11MCY23, the central bank data showed a current account surplus of $130 million, which is a significant improvement from 11MCY22’s huge deficit of $11.82bn.

In September, the PKR had plunged to an all-time low of 307.1 per USD, taking the CTYD depreciation to a staggering 26.27%.

However, the currency recovered significantly thanks to the government’s crackdown on speculators, hoarders, and smugglers who were draining dollars from the country.

The spread between interbank and open market rates, which reached a high of around 9% in May has now almost vanished, well below the IMF's 1.25% recommended limit.

Improved transparency, lower spread between interbank and black market rates, coupled with strict measures against dollar smuggling are also expected to boost workers's remittances.

These inflows will be crucial for the cash-strapped county to meet its external financial obligations and stabilize PKR.

Outlook

Going forward, the PKR's future hinges on multiple factors, with the completion of the IMF review and the release of next tranche in January, being a critical driver of the local currency's performance.

The IMF review will assess Pakistan's progress on meeting its obligations under the bailout agreement.

Additionally, the country would need to secure more aid from the IMF and other global lenders to meet its high debt obligations.

The local currency is also dependent on global oil prices, which have historically played a spoiler to the currency.

This is because Pakistan is a net oil importer, and increased volatility in oil prices can put pressure on the PKR.

Foreign inflows will also be crucial for the county to ease some pressure off PKR.

52 Week Performance

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Posted on: 2023-12-29T19:19:10+05:00