Rupee unlikely to witness major depreciation in coming months

KARACHI: The rupee is unlikely to see a significant depreciation in the coming months and is expected to end the year at around the 282 per dollar level due to ample dollar liquidity supported by healthy remittances and subdued imports amid a drop in global oil prices, a report said.

The rupee, which had been stable for the past few months, showed some moderate gains in the interbank market on Friday, closing at 278.16 versus the greenback after the International Monetary Fund announced that its board would meet on September 25 to review the $7 billion loan programme for Pakistan. On Monday, the rupee finished at 278.7 to the dollar.

The government has arranged over $2 billion in external financing to address the funding shortfall required to meet the IMF conditions, Jameel Ahmad, the governor of the State Bank of Pakistan, said this after announcing the monetary policy on Thursday. The SBP cut interest rates by 200 basis points to 17.5 per cent.

According to Tresmark analysis published on Saturday, it is critical to draw attention to a key trend this year: the notable rise in remittances, which have soared from about $2 billion to over $3 billion. This amazing achievement has largely gone unnoticed.

“This would not have been possible without shrinking the delta between the official and grey market rates. While this gap widened recently due to political uncertainty and scepticism around the IMF, the green light from the IMF should help stabilize this difference,” it said.

“Looking ahead, we expect remittances to remain robust, providing surplus liquidity in the system,” it said and added that with the dollar index likely to remain subdued and the real effective exchange rate (REER) consistently below 105, significant rupee depreciation seems unlikely. With weak local market demand, there is no immediate pressure from higher imports, including suppressed oil prices

“Given these factors, the USDPKR appears on track to close the year around the resistance level of 282/$,” it said.

The rupee fell by 20 per cent versus the US dollar in 2023. On December 29, 2023, the rupee closed at 281.86 to the dollar.

After experiencing significant depreciation in FY23, the local currency has regained ground over the last four quarters, supported by the IMF’s stand-by agreement, contained current account deficit and reduced political instability, said Insight Securities in a report released this week.

Notably, the sharp devaluation during FY23 caused significant hardship for ordinary people due to the economy’s structural weaknesses, primarily in the form of higher inflation, it said.

“We believe that in the coming months, Pakistan is likely to report a current account surplus due to subdued domestic demand and favourable commodity prices. Imports are averaging $4.5 billion, and we opine that given the slowdown in domestic demand, imports are expected to remain subdued resulting in contained CAD in the next few quarters,” it said.

Remittances, which had been lacklustre during 2023 due to domestic uncertainty and the gap between official and unofficial exchange rates, have started to recover, approaching 2022 levels.

“We believe this momentum is likely to continue, as our thesis is based on the significant shifts in the economic and political landscape over the past 12 months, with uncertainty having somewhat subsided. Additionally, concerns over a sharp devaluation are no longer prevalent,” it added.