Rupee is Killing It – But Here’s Why It Could Be Misleading

The Pakistani Rupee (PKR) has been slowly recovering but at a price.

The real effective exchange rate (REER) measures the PKR in the overvalued category, meaning that it is being valued greater than it should be at the moment. At the current REER of ~103, the rupee/$ interbank rate should be between 287-291.

*2nd April 2024 PKR/$ official interbank closing rate: 277.83

If push comes to shove, REER could spike to 110 by end-June, therefore some depreciation of the Rupee will be unavoidable.

What is the central bank up to? Remittances and exports are being matched by imports. The current account deficit (CAD) has come down, but we’re paying premiums through imports, so being happy about CAD would be silly.

Pakistan’s exports recorded a 1.08 percent decline to $2.555 billion in March 2024 when compared with $2.583 billion in February 2024. Import increased by 9.25 percent to $4.726 billion in March 2024 when compared with $4.326 billion in January 2024.

There’s a lot of discussion about whether our import financing is hurting the rupee amongst other things. Last year, several global credit rating agencies and brokerage houses tipped the rupee to fall to as low as 340/$ by December 2024, after crossing 300/$ somewhere during July of the same year.

Are they wrong? PKR is being supported as it was in 2022-23 and the whole idea of market forces determining its value doesn’t look like it is being adhered to. Ever since the International Monetary Fund (IMF) set a band range of 1.25 percent between open and interbank rupee/$ rates, we’ve been playing with it.

Here’s an interesting plot. For the first time since FY 2019-20, investors poured in $82 million in March 2024 in local T-Bills through Special Convertible Rupee Accounts (SCRA), according to latest central bank data. Since January 2024, these inflows have reached $126 million.

That’s one way to build forex cover and keep the rupee/$ slide on the down low.

But when Pakistan gets the new long-term deal from the International Monetary Fund, chances are high that more such funds will come to Pakistan to get high-yielding T-Bills and dollar bonds, which will provide short-term support to PKR.

In a recent interview with Bloomberg, Finance Minister Aurangzeb expressed confidence that the PKR would remain stable in the short to medium term, hovering around current levels of 277-278 against the US Dollar for the next six months.

“I don’t really see a huge pressure on the rupee at this point in time as we move forward. I think it’s going to remain range-bound around these [current] levels for like six months or so,” he stated.

He is right, but there’s a need to understand that such tweaks are temporary and nothing will stop the PKR from crashing if Pakistan doesn’t start making money this year.