By September 5, 2023, the rupee had depreciated over 26% during the calendar year, and it would have made it its worse year since the turn of the century. For context, 2008 was next in line.

But a nearly 9% gain since then to the end of December – largely on the back of administrative measures – meant the rupee closed 2023 with a cumulative calendar-year fall of 19.7%.

Despite the gain, the year was yet another sob story for the Pakistani rupee as it set new record lows against the US dollar on multiple occasions.

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Also read: Rupee’s performance in 2022

Rupee’s performance in 2021

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To be brief, and minus context, the rupee started off 2023 at 226.43, and closed the year at 281.86.

Since the turn of the century, the PKR has depreciated in 19 out of the 23 years, with 2023 emerging as the fourth-worst. Only the years 2008, 2018, and 2022 have been worse. Notice how the rupee has fallen more drastically since Pakistan moved to a more ‘flexible’ exchange rate.

Similar volatility also persisted in the open market as the PKR fell 17% from Rs236 to Rs284 in 2023 against the USD.

Reasons aplenty

Throughout the year, the country confronted multiple challenges including a rising external financing gap, challenging global financial markets, and local political instability that negatively impacted the foreign exchange (FX) reserves and built pressure on PKR.

The South Asian country began 2023 with the Pakistan Democratic Movement (PDM)- led coalition government, at the helm of affairs. Senator Ishaq Dar, the senior PML-N leader, also dubbed as a ‘finance wizard’, was running the country’s financial affairs.

Dar, widely seen as an advocate of a strong rupee, used administrative controls to keep the local currency stable, which many termed artificial.

However, the government struggled to ensure dollar inflows from multilateral and bilateral partners and remained unable to revive the stalled International Monetary Fund (IMF) programme.

With time running out and the risk of sovereign debt default becoming increasingly real, the policymakers were left with no other option but to let the currency go, a key condition of the Washington-based lender.

On Thursday, January 26, 2023, the Pakistani rupee witnessed historic depreciation against the US dollar in the inter-bank market, registering a loss of 9.61% or Rs24.54 in a single session to settle at Rs 255.43 as the country finally moved to fulfil the IMF demand.

A similar scenario was witnessed in the open market after the Exchange Companies (ECs) lifted what they called a self-imposed price cap, and the Pakistani currency lost 19.40 rupees for buying and 19 rupees for selling against USD, closing at 260 and 262, respectively.

However, despite that single-day fall, the IMF deal remained elusive which kept the markets awry while the gap between the interbank and open market continued to widen.

On March 03, 2023, the Pakistani rupee saw yet another dramatic fall, plummeting 6.66% or Rs18.98 to settle at a new record low of 285.09 against the US dollar in the inter-bank market.

In the coming weeks, the rupee remained largely rangebound, while the authorities desperately sought to resume the stalled IMF bailout programme.

In May, Pakistan’s already reeling economic landscape took another shock in the form of increased political turmoil as the country was rocked by deadly unrest sparked by Pakistan Tehreek-e-Insaaf (PTI) chief Imran Khan’s arrest. Protesters stormed military buildings while state buildings and assets were also attacked and set ablaze.

The political volatility exacerbated uncertainty in the market regarding the IMF programme, and the Pakistani rupee saw another round of massive depreciation, as it plunged to a fresh low of 298.93 on May 11, 2023, against the US dollar in the inter-bank market.

However, the fall remained short-lived as the dust settled a bit on the political front and the rupee staged a spectacular comeback, the very next day, registering a massive gain of nearly Rs14 or 4.85% to settle at 285.08 against the US dollar.

The local currency, however, still struggled with the gap between the inter-bank and open market climbing to a high of 9% or Rs27 in May, 2023. This was a major concern as under the IMF Structural Benchmark, the government was asked that the average premium between the interbank and open market rate will be no more than 1.25% during any consecutive 5 business day period.

The market remained in wait for resumption of the IMF programme, and its prayers were finally answered at the end of June when the IMF authorities and Pakistan reached a $3 billion nine-month Stand-By Arrangement (SBA), helping the country avert a sovereign default.

As expected, the PKR made giant strides against the USD, appreciating 3.83% or Rs10.55 to settle at 275.44 in the inter-bank market on July 04.

In the coming days, the IMF Executive Board approved the nine-month SBA, allowing for an immediate disbursement of about $1.2 billion for Pakistan. The development improved the country’s external reserve position while strengthening the rupee.

Meanwhile, on August 14, the term of the PDM government came to an end and Pakistan swore in a caretaker cabinet under interim Prime Minister Anwaar-ul-Haq Kakar, tasking it with running the country until fresh elections.

The caretaker cabinet, seen as one of the most empowered in Pakistan’s history, was tasked to lead Pakistan towards economic stabilisation with former SBP Governor Dr Shamshad Akhtar taking charge as Finance Minister.

Despite securing the IMF deal, Pakistan’s economic situation didn’t show much improvement as a widening current account deficit amid a rise in imports and a lack of further foreign exchange inflows not only kept the inflation rate at a record high i.e. 22 percent but also put pressure on the rupee’s position in the local market.

On August 22, 2023, the rupee fell to a new record low against the US dollar, hitting 299.01.

However, unlike what was seen in May there was no quick comeback for the Pakistani currency this time and it continued to weaken. On September 05, 2023, PKR clocked in at a new low of 307.1 against the USD in the interbank. Meanwhile, in the open market, the rate gap continued to widen and the rupee hit above the 320 level.

This compelled the interim government to take administrative steps to tighten the screws around smuggling and hoarding of currency and as a result, countrywide raids were reported with dozens of illegal currency exchanges barred from running operations and foreign currency worth millions confiscated.

Apart from the caretaker setup measures, the SBP also scaled up efforts to clip the wings of the high-flying dollar and announced a list of “structural reforms” in the Exchange Companies’ (ECs) sector.

“As part of these reforms, leading banks actively engaged in foreign exchange business will establish wholly-owned Exchange Companies (EC),” said the SBP in a statement in September.

“Furthermore, various types of existing Exchange Companies and their franchisees will be consolidated and transformed into a single category of Exchange Companies.” In addition, the SBP also raised the minimum capital requirement for EC from Rs200 million to Rs500 million, raising the barrier to entry for the private sector.

“This reaped positive results while helping reduce the currency rate gap,” Exchange Companies Association of Pakistan (ECAP) Chairman Zafar Paracha, told Business Recorder.

As a consequence, the PKR saw one of the longest appreciation runs against the USD. The local currency maintained a positive close for 28 successive sessions, reaching 276.83 on October 16, as it cumulatively gained 10.93% since hitting a record low of 307.1 in the inter-bank market on September 5.

In doing so, the PKR ironically emerged as the best-performing currency in the world in that period.

Good things seldom last long though, and economic fundamentals pushed the local currency downhill, and the rupee saw a 17-session losing spree from October 16 onwards.

On November 15, the IMF staff and Pakistani authorities reached an agreement on the first review of the $3-billion, nine-month SBA. This improved market sentiment that, as expected, bolstered the local currency.

Since then, the local currency has maintained its momentum and has achieved marginal gains each passing session.

The market has now set its eyes on the agreement approval by the IMF’s Executive Board, which is expected to meet on January 11. Upon approval, Pakistan will have access to around $700 million.

“The IMF programme is essential for the stability of the currency,” Samiullah Tariq, Head of Research at Pak Kuwait Investment Company Limited, told Business Recorder.

Currency outlook

The rupee is expected to depreciate 5 to 6 percent in 2024, said Tariq.

The expert was of the view that the inflation rate will come down next year, hitting an average 20 percent, which will bode well for the local currency. “However, despite the decline, the currency would remain under pressure on account of the current account deficit, which would remain as Pakistan is an import-based economy,” he said.

On the other hand, Pakistan’s financial credentials remain strong, said Zafar Paracha. “We expect the PKR to strengthen to 270 level by the first quarter of 2024. However, for that, the ongoing measures should continue, otherwise the currency would deteriorate.”