December 09, 2024 (MLN): Pakistani Rupee (PKR) is silently and steadily on track to snap its seven-year-long losing streak against the mighty Dollar this calendar year, a magnificent comeback from being titled as one of Asia’s worst-performing currencies last year.

As of December 06, 2024, the interbank rate of the currency against the greenback stood at 278.009, marking a not-so-usual 1.39% gain over the year—defying all odds and negative perceptions.

This probably would set out as the highest percentage gain since 2014, where the home unit gained 4.82% against the mighty Dollar.

What further draws attention is that the USDPKR exchange rate has recovered a substantial 10.5% from its all-time high of 307.01, which was reached in September 2023, just over a year ago.

Interestingly, the domestic currency hasn’t witnessed any drawdown of 1 rupee or more against the mighty U.S. Dollar in 264 days.

Meanwhile, in percentage terms, the exchange rate has traded under a change range of -0.08% to 0.27%, reflecting the currency’s lowest volatile zones, in contrast to its most volatile phase last year (Jan-May 2023).

The cash-strapped nation managed to recover its currency’s firmness owing to a significant number of reasons.

Broadly speaking, the extended IMF loan program, consistent crackdowns on the so-called "Dollar drainers", rising exports, falling imports, growing reserves, SBP’s forex initiatives and substantial remittances from Pakistan's diasporas working abroad have collectively driven this remarkable turnaround.

Based on the IMF’s condition of a market-determined exchange rate, the government remained stringent in eliminating the multiple currency practices related to exchange rates applied to transactions with the SBP, along with all the remaining exchange restrictions resulting from the limitation on advance payments for imports.

This initially triggered an increase in dollar demand. However, the government’s robust army-backed crackdown against culprits involved in the black market and dollar hoarding eliminated the spread between interbank and open market rates.

The gap between the two markets, which had peaked at around 9% in May last year, now stands well below the IMF's recommended limit of 1.25%.

Perhaps the black-market dilemma has now eased, as it appears to have been somewhat eliminated due to robust reforms implemented by the government and the country’s central bank.

The Economic Revival

Over the past year, the currency faced persistent pressures due to high debt payments, current account deficits, depletion of foreign exchange reserves, increased profit repatriation, political instability, and soaring inflation.

This year, while not all factors have improved, a majority have shown remarkable recovery.

Firstly, the foreign exchange reserves held by the central bank have surpassed the $12bn mark, standing at the highest level since March 2022 with a surge of $3.82bn or 46.43% this calendar year.

SBP also eased restrictions on dollar outflows allowing clearance of dividend backlogs, which were previously restricted to shield reserves from further deterioration.

Shortly after this, JPMorgan flagged concerns about the potential consequences of dividend backlogs, which may result in a weaker PKR in the near term.

Nevertheless, foreign exchange reserves continued to build up, supported by inflows from multilateral and bilateral partners. Meanwhile, PKR defied expectations, potentially ending the year on a positive note against the dollar.

All thanks to the inflows from the IMF under the SBA agreement, which ultimately boosted the confidence of other multilateral and bilateral partners to extend further support to Pakistan.

Recently, Saudi Arabia extended the term for the deposit of $3 billion maturing on December 05, 2024, for another year to support the nation’s efforts to build its reserves without interruption.

The troublesome current account balance, which had flashed red in headlines the majority of the time is in surplus for the third consecutive month.

Exports have started to rise by a greater proportion to imports, despite removing restrictions on the opening of LCs.

Additionally, Workers’ remittances, a key source of foreign exchange earnings for Pakistan, have averaged $2.87 billion per month in 2024—showing a growth of over 32% compared to the $2.17bn monthly average during the first 10 months of the previous year up to October.

Pakistani diasporas working abroad have increasingly shifted to formal channels for sending remittances, showcasing their trust in the currency’s stability given a minimal spread between interbank and kerb market rates.

The indirect benefits achieved through the global lender extended beyond the ones mentioned earlier. Both Fitch Ratings and Moody's Investors Service upgraded Pakistan’s long-term ratings, citing improved macroeconomic conditions and a moderately better government external position from previously very weak levels.

On the fiscal front, the country achieved another milestone by recording its first budget surplus in over two decades during the first quarter of fiscal year 2024-25 thanks to increased revenue and a bumper surplus profit of the State Bank of Pakistan.

The central government’s debt also experienced its largest decline since September of the previous year and has been on a downward trend for the second consecutive month.

Turning to the most important economic indicator, inflation, it displayed a surprising trend, easing to 4.9% in November — the lowest rate of price increase since April 2018 and well within the central bank's target range of 5-7%.

The term 'surprising' highlights the greater-than-expected slowdown in price gains.

Food prices and transportation costs have shown a drop compared to last year, being a direct benefit to lower-income groups of the country.

Petrol prices in the country have reduced significantly from last year. For the first half of December, the price stands at Rs252.1 per liter, marking a decline of 10.39% or Rs29.24 compared to the same period last year.

This was primarily a reflection of falling international oil prices over the year. Brent Crude, the key benchmark is down 7.87% so far this year due to eased supply concerns and increasing signs of weak economic activity across the globe.

Accordingly, Pakistan’s oil import bill—one of the primary drains on the country’s Dollar reserves—narrowed significantly by 15.83% in the first 10 months of the ongoing calendar year against the same period last year—the reason of decline in overall import bill.

Declining consumer prices, along with stable economic operations have significantly improved the outlook for the domestic currency.

Ultimately, the purchasing power of the home unit and the country’s position as a price taker in global energy and food commodity markets has improved.

Another related favorable transition for the local Rupee was observed as the real interest rates in the economy turned positive in March 2024, after a period of over 3 years. Currently, it stands at 10.14%.

Considering this, the central bank initiated the much-awaited monetary easing in the country at a faster-than-expected pace.

The policy rate is down 700bps since its peak of 22% in June 2024, with anticipation of another potential 200bps cut on the cards, encouraging borrowers to take loans and invest in economic activity.

Furthermore, commercial banks in their pursuit to avoid incremental tax on ADR ratios below 50% have jacked up their lending to the private sector at more favorable financing rates.

Pakistan's Rupee Real Effective Exchange Rate Index (REER) showed a strong recovery, rising from historical lows in May 2023 to 100.86 as of October 2024.

However, the journey was not entirely advantageous for the currency as certain hardships arose due to political uncertainty firstly surrounding the delays in the election outcome and in recent time due to protests in the country.

The U.S. Dollar Index (DXY), which tracks the value of the greenback against six other top currencies also placed slight pressure on PKR as it improved by 4.8% to 106.2 as of December 09.

Nonetheless, all the positive factors collectively were significant enough to provide a stable and smooth path for the Pakistani Rupee, enabling it to potentially break its losing streak against the mighty Dollar and end the year on a stronger note.

Central Bank’s Initiatives

SBP continued to play its role of imposing strict regulatory controls to ensure transparency in the forex market, by revoking licenses of exchange companies and penalizing banks found breaching the code of conduct.

Progress was also noted in the development of various exchange companies of listed banks, with the majority commencing operations in different cities after receiving operational licenses from the central bank.

In a recent development, SBP has started unveiling data for FX interventions in the interbank FX market, as per which, the net purchase of Dollars in three months from June to August has reached $1.86 billion.

This action hints at improved Dollar liquidity in the interbank market and reflects efforts by the SBP to bolster its reserves.

To ensure an adequate supply of cash Dollars in the open market, the central bank even has once again raised the validity of allowing Exchange Companies (ECs) to import cash US Dollars up to 50% of the value of their export consignments by a year.

Outlook

The currency's outlook appears quite gloomy, considering both the anticipated positive and negative pressures.

In its country report issued in October, the IMF mentioned that Pakistan’s gross reserves are projected to reach $22.5 billion by the end of FY28, covering 3.1 months of imports.

Multilateral disbursements are projected to reach $14bn over FY25–28 (including $7.1bn from the World Bank and $5.6bn from the Asian Development Bank) with key bilateral creditors fully maintaining their exposure through new financing activities.

Additionally, the country is expected to unlock proceeds from the extended IMF program over time, which would further bolster its reserves.

However, the recent stability of the rupee should not lead to renewed expectations that this will persist in the future as policy slippages, together with lower external financing, could undermine the narrow path to debt sustainability and place pressure on the exchange rate.

Furthermore, a potential resurgence in Pakistan's social tensions, reflecting the complex political scene and high cost of living could weigh on policy and reform implementation.

The currency will also remain exposed to geopolitical tensions, which could drive commodity prices higher and tighten global financial conditions.

Another significant threat that has the potential to overshadow all good desires for the Pak Rupee is the soaring debt obligations, which would create an external funding gap and might push Pakistan away from stability to the bad books once again.

On the other hand, productive engagements with Saudi Arabia, China and other countries are expected to boost trade, cooperation, and Foreign Direct Investment (FDI) into the country, which would in turn attract Dollars into the country.

It is important to mention that still, significant trading sessions remain to decide the fate of Pak Rupee this calendar year. Considering the historical trend observed throughout the year, it can be predicted that there won't be substantial fluctuations and the currency is likely to end positively against the USD.

Copyright Mettis Link News

Posted on: 2024-12-09T12:04:54+05:00