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The Pakistani currency, the Rupee, recently witnessed a remarkable surge, gaining 3.83% against the US dollar in the inter-bank market, and reaching a four-month high at Rs275.44. The currency also showed a 3.57% rise in the open market, reaching Rs280 against the greenback. This surge comes as the International Monetary Fund (IMF)’s new loan programme defended the value of the Rupee, causing speculators to suffer losses.
The significant increase in the Rupee’s value is attributed to the signing of a staff-level agreement (SLA) between Pakistan and the IMF for a new nine-month loan programme worth $3 billion. This agreement, along with other expected inflows from multilateral creditors and friendly countries, is predicted to help rebuild foreign exchange reserves to approximately $9 billion and support the Rupee against the dollar.
New IMF Loan for Pakistan
Below our initial response on this
Pakistan has entered into a new US$3bn IMF short-term program, Standby Arrangement (SBA), which will be for 9 months.
Pakistan has entered into such IMF SBA in the past also in 2008 and 2000.
This new program is…
— Mohammed Sohail (@sohailkarachi) June 30, 2023
Despite the recent recovery in foreign exchange reserves, they remain critically low, providing only one-month import cover for the nation. To address the concerns raised by the IMF regarding the functioning of the domestic currency market, the government took measures such as reopening all imports and adjusting the FY24 budget in line with IMF recommendations.
Experts project that the currency may temporarily recover to Rs270-275/$ but anticipate that this massive rebound will last for a brief period of around two weeks. The reopening of all imports is expected to increase the demand for foreign currency and put pressure on the local currency.
The historic drop of 28% (Rs81) in the Rupee’s value during the previous fiscal year 2023 was largely attributed to persistent delays in the revival of the $7 billion IMF programme, which ended prematurely on June 30, 2023.
Arif Habib Limited (AHL) reported that the 3.83% gain in a single day in the inter-bank market was the largest increase in the past seven weeks. The Exchange Companies Association of Pakistan (ECAP) President, Malik Bostan, stated that the Rupee’s recovery was much-needed from being undervalued by speculators.
Bostan predicts that the currency will continue to recover to Rs250/$ in the near future if foreign currency inflows, including workers’ remittances, export earnings, foreign portfolio investments, and foreign direct investments, remain high. He also mentioned that Pakistan is set to receive multi-billion-dollar investments from China under the second round of China-Pakistan Economic Corridor (CPEC) projects.
When measured on the global matrix using the real effective exchange rate (REER), the Rupee is still far from its fair value of Rs245/$. The fair value of the Rupee against the dollar is considered to be in the range of 295-105 on the REER index. Between 2019 and 2023, the central bank maintained the REER at an average of 95 on the index, suggesting that the currency still has room to recover to Rs245-250/$ if the supply of foreign currency remains stable.
Additionally, Pakistan’s Eurobonds continued their rally for the third consecutive working day, suggesting a subsiding risk of default in the short to medium run of FY24. The 10-year global bond, worth $1 billion and maturing in April 2024, reached a one-year high, boosting investor confidence.
In contrast, gold prices in Pakistan continued to decrease, which dropped by Rs2,200 to Rs205,000 per tola (11.66 grams). This decline comes after gold reached a record high of Rs240,000 in May.
In conclusion, the Pakistani currency’s recent rebound is an encouraging sign for the nation’s economy, backed by the IMF’s new loan programme and expected inflows from various sources. However, experts caution that sustained efforts are required to stabilize the currency and build sufficient foreign exchange reserves for long-term economic stability.
