The Pakistani Rupee (PKR) is headed for one of its toughest tests yet and this time, mere positive sentiment or bold claims may not be enough to prevent it from crashing again.
On the condition of anonymity, a high-profile investment banker told ProPakistani that the rupee could plunge below 250 against the US Dollar by the end of the year, unless our inflows exceed outflows.
Sources told ProPakistani that a $1 billion payment against a government-issued Sukuk is due in December 2022, with another $1.17 billion to Paris Club countries during the current fiscal year. The State Bank of Pakistan’s foreign reserves fell by $106 million to $7.9 billion in the week ended September 30.
“Don’t let the rupee uptick trick you. We’re facing a massive currency crunch in the coming few months with a lot of bills beginning with maturity payments starting in December. The PKR will drop below 250 by December if dollar inflows can’t outpace outflows”, the investment banker said.
Since late September, the rupee has recovered faster than fundamentals would suggest, as Finance Minister Ishaq Dar claimed that the exchange rate should drop below Rs. 200. The domestic currency gained despite broader strength of the Dollar Index.
Most analysts attribute PKR’s recent rise to Dar’s appointment as Pakistan’s finance chief. Money changers view Dar as an advocate of a strong home currency, and trends since his arrival support that observation.
Interestingly, the rupee saw a similar boost in August after the Saudi credit rollover and IMF talks. Miftah Ismail, the finance minister at the time, stated that the rupee was undergoing a due correction and needed to settle between 215-217. However, the currency began to fall on August 22 and kept falling until it reached a rock bottom on September 22 at 239.71.
Historical trends show that central bank reserves are a good indicator of a government’s wallet, but currently, they paint a bleak picture. According to Amreen Soorani, Research Head at JS Global, the country’s forex reserves reflect an import cover of barely 6 weeks.
She said:
SBP reserves are reflecting an import cover of barely 6 weeks, leading to some pressure on the currency anticipated with time. The ongoing rally seems sentiment driven and materialization of dollar inflow would be needed for these levels to sustain.
For the time being, trends indicate that the PKR could strengthen to the 210 to 215 level against the USD, though anything below that would eat into export competitiveness. Independent economic analyst, A. H. H. Soomro, told ProPakistani:
Given USD global strengthening, domestic inflation & trade deficit, it should not appreciate beyond 210 to 215 level. That is a sustainable level. Further appreciation would erode our export competitiveness as regional currencies are seeing depreciation as well.
Strengthening Fundamentals
Broadly speaking, market optics and the new finance minister’s exchange rate rhetoric have helped boost the rupee, but having sound economic fundamentals would be the key to getting on a solid footing. The International Monetary Fund projects Pakistan’s trade deficit to widen over the next five years with imports expected to be about twice the level of exports. Recent devastating floods could weigh on those projections.
Shoring up Pakistan’s reserves and boosting exports may be the need of the hour, though moving the needle on the latter is unlikely in the short term. That leaves us with restricting imports to manage our trade deficit but again, our import bill is likely to inflate due to floods. Other avenues to improve our inflows could include remittances and foreign aid linked to the floods. Economic momentum remains subdued as unemployment and inflation are rising.
The dollar has benefited from a spike in demand as global investors seek shelter in US-denominated assets, which require dollars to buy. Global central banks are raising interest rates, fueling recession concerns, while the Russia-Ukraine war that began late in February has not only disrupted supply chains but also stoked market volatility.
The world is no doubt navigating a dynamic environment, with several factors at play. The good news is we’ll only be judged for factors within our control.
