The PKR has been slightly appreciating for the past fifteen months, and it’s hovering around 277-278 levels against the USD for the last nine months. The inflows have remained in surplus in the past few months, which is evident from the current account posting a surplus of $944 million in 5MFY25 and SBP buying $1.9 billion from the interbank market in three months from June to August 2024. Therefore, SBP reserves are up to $12.1 billion from $9.3 billion in the fiscal year to date.
However, there are early indications of some unease, which may warrant a marginal currency depreciation. A number of treasury officers from large banks echo these sentiments, while the SBP appears comfortable due to the improved inflows. At the same time, there is pressure building up from exporters who are losing competitiveness due to the recent depreciation of regional currencies. “We have orders, but our margins are squeezing’, summed up by a large textile exporter.
Both the Indian and Bangladeshi currencies have recently depreciated against the USD, with the Indian rupee under increasing pressure. The REER value for November for India came in at 108, which is making markets expect further depreciation of INR. Then Bangladesh has its own economic and political issues.
Another indicator that cannot be ignored is the strengthening of the US dollar index future, which is up from 102.98 to 108.02 since Trump won the US presidential elections in November. The US 10-year government bond yields have risen from a low of 3.75 percent to 4.61 percent, attracting liquidity from other economies to the US. This is leading to the depreciation of the currencies of Indian and other Pakistani exporters’ competitors.
However, the controlling circles in the twin cities of Rawalpindi and Islamabad are of the view that the PKR should be appreciated further, which is not in sync with the ground realities. Pakistan’s own dynamics show that it’s prudent to have a marginal 1–2 percent depreciation in the PKR against the USD.
The SBP Governor himself has said that there is pressure from non-oil imports, and there might be lumpy government and IPP-related repayments in December. Moreover, the increase in oil imports over the past few weeks is expected to increase the payment pressure in January. And that may result in the end of the current account surplus streak in January, if not in December.
Another factor that cannot be ignored is the impact of the 900 bps (41%) lowering of the interest rates on economic demand (and in turn on import payments) in a few months. It would be challenging to maintain a current account surplus, as when interest rates were high, the economy was strangulated, and now businesses are ready to borrow, and banks are also keen to lend.
“They have no choice but to depreciate the currency,” candidly put by a treasury head of a big bank. “You cannot have the best of both worlds; if interest is kept low, the currency has to adjust “, he added. “Savers are moving liquidity from fixed-income instruments—risk-takers are investing in stocks while others are slowly buying dollars,” explained the treasury head of another bank.
Having said that, there is no panic in the market. There is no pressure from the open market. The interbank market is functionally fine under the new rules. “No interbank market exists anymore,” lamented a senior treasury officer of a large bank. “We are allowed to manage our outflows from our inflows, and SBP rarely permits us to run short positions’, he added. Thus, banks are opening L/Cs based on exports and remittance inflows they have. If the current account is in surplus, this does not result in any import restrictions. However, the situation may change if the demand pressure increases.
It is reiterated that there are no signs of panic. It’s a cautious call to act in time. The REER reading was 102.92 on Nov. 24, and it is likely to go up in December. There are payment pressures coming in due to higher oil imports recently, the unwinding of FE loans to boost the ADR of banks, and general demand boosts due to sharp monetary easing.
SBP must be cognizant of these facts. However, it may be worrying that if PKR changes direction, the speculation may start. However, without timely actions, this might be a reality at some point. Thus, SBP should improve its communication and let the currency adjust without creating panic.
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