After enduring one of the worst years in 2023, which saw the rupee depreciate by 19.7%, 2024 brought much-needed stability to Pakistan’s currency market.

Administrative measures announced by the government and steady inflows ensured that the local currency would remain largely stable against the US dollar throughout the 12 months.

To be brief, the rupee started off 2024 at 281.86, and closed the year at 278.55, reflecting a marginal improvement of nearly 1.2%, a first annual appreciation since 2016 and the best year since 2015.

Similar stability was also witnessed in the open market as the PKR gained nearly 1% from Rs280 to Rs278 by the end of 2024 against the USD.

The currency stability is also “supported by a well-managed external account position, higher remittances and rising exports amid tight monetary and fiscal policies,” said AKD Securities in its report titled Pakistan Strategy 2025.

Overview of 2024

Pakistan kicked off 2024 under the caretaker government led by interim Prime Minister Anwaar-ul-Haq Kakar.

While the primary purpose of a caretaker government is to ensure free and fair elections, the then 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 heading the pivotal Finance Ministry.

Also, Pakistan was under a $3-billion, nine-month Stand-By Arrangement (SBA) with the International Monetary Fund (IMF), which was inked in June 2023.

Among the caretaker government’s key achievements were measures to curtail currency smuggling to bring down the exchange rate, and the successful completion of the short-term programme with the Washington-based lender.

“We were obligated to make sure that we don’t intervene in the market, but all the VCV, alongside and cross border, which was destabilising our currency,” Dr Shamshad stated in February. Therefore, joint action was launched, she said back then.

Additionally, the State Bank of Pakistan’s (SBP) structural reforms in the Exchange Companies’ (ECs) sector, announced earlier, also complimented the government’s efforts in keeping the currency stable.

In March, Shehbaz Sharif took oath as Prime Minister for a second time, almost a month after a general election marred by large-scale voter fraud allegations that resulted in a split mandate.

Muhammad Aurangzeb, former Chief Executive Officer (CEO) of the country’s largest commercial bank HBL, was appointed as the Finance Minister of Pakistan.

Aurangzeb was picked over several veterans previously involved in handling the troubled $350 billion economy including four-time finance minister Ishaq Dar.

The former banker, an advocate of minimal government intervention, who believes that the “government has no business being in business” called for more private sector participation in the economic affairs of Pakistan.

Among Aurangzeb’s key priorities was to secure a new long-term agreement with the Washington-based lender following the completion of the nine-month SBA in April.

After months of negotiations, the IMF reached a staff-level agreement (SLA) with Pakistan for a $7-billion, 37-month loan programme in July, aimed at cementing stability and inclusive growth.

The new package termed by the government its ‘last one’ paved the way for inflows form other multilateral and bilateral institutions, which improved the inflow position of Pakistan.

Therefore, the country enjoyed a relative sense of macroeconomic stability throughout the year, which was also reflected in the exchange rate.

“This currency stability is due to administrative measures taken by the government,” Zafar Paracha, Secretary General of the Exchange Companies Association of Pakistan (ECAP), told Business Recorder.

“One of the biggest positives in 2024 was that the rate difference between inter-bank and the open market became negligible, which led to currency stability in the market,” he added.

The currency dealer informed that during the year, ECs floated $500 million into the inter-bank market on a monthly basis.

On the demand side, import control measures by the government also played a critical role.

“In 2023, Pakistan was nearing a default due to a balance of payment crisis amid dwindling foreign exchange reserves, which created a panic-like situation in the currency market,” Saad Hanif, Head of Research at Ismail Iqbal Securities, told Business Recorder.

“We were able to avoid default only through import restrictions, which stabilised our current account, the effect of which was reflected in the currency stability in 2024.

“However, this stability has come at a price, and that is lowered demand, especially in the construction sector,” he noted.

On the bright side, a significant jump in remittance inflows kept the current account position stable which provided additional support to the currency, said Sana Tawfik, Head of Research at Arif Habib Limited (AHL).

“The SBP has not only managed to repay loans but also improved its forex reserve position owing to timely purchase of dollars from the market,” Tawfik told Business Recorder.

According to SBPs latest data, Pakistan’s cumulative remittance inflows during January-November 2024 clocked in at $31.6 billion, compared to $23.9 billion recorded in the same period of 2023, registering an increase of 32%.

This helped the country post a current account surplus of $944 million in the first five months of the current fiscal year (5MFY25), in contrast to a massive deficit of $1.676 billion in the same period of the previous fiscal year.

Currency outlook for 2025

A majority of market experts largely expect the currency to remain stable in 2025.

“We expect the rupee to show stability, supported by the IMF program and strong remittance inflows. The IMF program would ensure tight monetary policy, with real positive rates on a forward-looking basis, ensuring exchange rate flexibility, FX market functionality, and strengthening institutions to safeguard financial stability,” said AKD Securities.

“Meanwhile, continuing efforts to deepen the interbank FX market along with greater price discovery would further support currency stability.”

However, there were concerns of hiccups in the ongoing IMF programme due to unmet targets, which may put the local currency under pressure.

“The IMF is scheduled to meet Islamabad’s authorities in March next year for the programme review, and several IMF’s benchmarks including revenue collection target, and increasing gas prices among others remain unmet,” said Hanif.

“If the concerns are not addressed, this may delay the release of the IMF tranche,” he said.

Meanwhile, Sana Tawfik of AHL projected that the rupee would devalue in the coming months and hit 290-295 level against the US dollar by December 2025.

“The devaluation comes on the back of an uptick in imports, which is expected as economic activity increases.

However, not much reserve drain is expected as long as they remain manageable,“ the market expert added.

Conversely, Zafar Paracha believes that the rupee remains ‘undervalued’ against the US dollar and may strengthen to Rs240-250 by the end of 2025.

“Pakistan’s financial credentials remain sound, however, there is financial mismanagement, which needs to be fixed,” he said.