The import pressure is gradually increasing. There is no immediate strain on the currency per se, but demand is picking up. The Real Effective Exchange Rate (REER) is also creeping upward and is likely to cross the 105 mark in the next couple of months. Imports (on a shipment basis) crossed the $5 billion mark in December 2024, the first time since December 2022.
An upward trend in oil imports is evident. In December 2024, the quantity of oil imports reached its highest level since June 2022, and the November 2024 imports were also significantly higher than in previous months. These indicators suggest rising demand, possibly driven by a shift from smuggling via Iran to formal banking channels.
Whatever the reason, the pressure on payments due to the higher quantum of imports is expected to be reflected in the interbank market, as payments are typically made with a lag of 1-2 months. Reviewing these numbers, BR Research reached out to treasury offices in commercial banks, and most reported facing some payment pressure.
However, the majority believe there is no immediate pressure on the currency to depreciate, as remittance inflows remain healthy, and the State Bank of Pakistan (SBP) appears determined to prevent depreciation. At the same time, many emphasized that the SBP should adopt a measured monetary policy approach, recommending no more than a 100-bps rate cut on Monday, followed by a pause.
Another factor contributing to reduced pressure on the currency is the availability of cheap, dollarized financing under FE-25 loans for some oil importers. Not long ago, banks actively encouraged lending to reliable customers to avoid higher Advance-Deposit Ratio (ADR) tax. Many importers took advantage of low-rate dollar-based loans, with Oil Marketing Companies (OMCs) lifting a substantial portion.
Similarly, exporters availed of foreign currency loans, and the payments from future exports are now maturing, making the interbank market more liquid. Additionally, the consistent inflow of remittances has contributed to PKR stability, preventing all payment pressures from surfacing in the market.
Nevertheless, a point will come when these factors lose their cushioning effect. As the higher lending to avoid ADR tax unwinds and oil import pressures increase, export proceeds could diminish, as many exporters may have already booked payments in advance. Historically, exporters also tend to hold back current proceeds when they anticipate currency depreciation.
Some treasury officials remain optimistic, expecting remittance inflows to grow in March and April during Ramadan and Eid. As a result, most do not anticipate depreciation before June. However, by that time, the impact of monetary policy easing over the past six months could start manifesting in increased imports, with average monthly imports projected to hover around the $5.5 billion mark.
The SBP needs to account for this timeline. While the central bank likely has a more comprehensive understanding than the banks, its officials are hesitant to openly share insights with the media. “The focus should be on the currency, as it fuels inflation,” one treasury official urged, advising the SBP to adopt a cautious monetary policy stance. He added, “With the US slowing its rate cuts and the dollar index rising, a cautious approach is necessary.”
“The market is dry, and even the SBP acknowledges it,” said another bank’s treasurer. “We are delaying import payments—especially for contracts and open accounts,” he added. “Small banks are under pressure,” noted another treasury officer. “The REER could rise to 108-109 by July, and that might be when the currency begins to move,” another treasurer concluded.
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