The Pakistani rupee has soared to a two-week high, inching just below Rs286 against the US dollar in the interbank market. This bullish trend has continued for the third consecutive working day, propelled by economic optimism and the anticipation of securing the next International Monetary Fund (IMF) loan tranche amounting to $700 million.
According to data from the State Bank of Pakistan (SBP), the local currency exhibited a 0.19% increase, amounting to Rs0.53, ultimately closing at Rs285.97 against the greenback. These recent gains come in the wake of the scheduled meeting of the IMF executive board on December 7, 2023. This meeting is anticipated to finalise approval for the release of the next tranche, reflecting positively on the outcomes of the first review conducted between November 2-15.
Over the past three working days, the currency has seen a cumulative rise of 0.75%, or Rs2.17, marking a partial recovery from a seven-week low of Rs288.14/$, where it had suffered a loss of around 4%.
The Exchange Companies Association of Pakistan (ECAP) reported a 0.26% gain, closing at Rs287.50/$ in the open market. Despite a slight widening in the rupee-dollar exchange rate between the markets to Rs2, it remains within the IMF-recommended level of 1.25%.
Real Effective Exchange Rate (REER)
In October, Pakistan’s Real Effective Exchange Rate (REER), which measures the local currency against the currency basket of trading partner countries, experienced a significant appreciation of 6.9 within just a month. The REER index surged to 98.6 in October 2023 from 91.7 in September 2023, indicating a potential overvaluation.
While a higher REER tends to make imports cheaper, it could render exports less competitive. The central bank has traditionally maintained REER around 95-96 during periods of satisfactory foreign exchange reserves. However, the current reserves, which are less than a two-month import cover, suggest a need for depreciation to support exports and discourage imports.
The recent appreciation to 98.6 followed the domestic currency strengthening to Rs281.47/$ by the end of October, compared to Rs287.73/$ on September 28, 2023.
Analysts believe that these currency dynamics are not only reflective of short-term market sentiments but also underscore the broader economic outlook. The positive stance from the IMF and the subsequent boost in foreign exchange reserves are contributing factors. However, experts advise cautious optimism, emphasising the need for continued economic reforms to ensure sustainable growth and stability in the foreign exchange market.
Published in The Express Tribune, November 21st, 2023.
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