The Pakistani rupee surged to a two-week high, settling just below Rs 286 against the US dollar in the interbank market. This upward trend continued for a third consecutive business day, boosted by economic optimism and the expectation of securing the next tranche of the International Monetary Fund (IMF) loan amounting to 700 million dollars.
According to data from the State Bank of Pakistan (SBP), the local currency gained 0.19% to Rs 0.53 to finally close at Rs 285.97 against the dollar. These recent gains come in the wake of the scheduled meeting of the IMF Executive Board on 7 December 2023. This meeting is expected to finalize the approval for the release of the next tranche, positively reflecting the results of the first assessment carried out between 2 November -15.
Over the past three business days, the currency has seen a cumulative gain of 0.75%, or Rs 2.17, marking a partial recovery from a seven-week low of Rs 288.14/$, where it had suffered a loss of around 4%.
Equities Association of Pakistan (ECAP) reported a gain of 0.26% to close at Rs 287.50/$ in the open market. Despite a slight widening in the inter-market rupee-dollar rate 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 a basket of currencies of trading partner countries, saw a significant appreciation of 6.9 in just one month. REER jumped to 98.6 in October 2023 from 91.7 in September 2023, suggesting a possible overvaluation.
While a higher REER tends to make imports cheaper, it could make exports less competitive. The central bank has traditionally kept the REER around 95-96 during periods of adequate foreign exchange reserves. However, current stocks, which cover less than two months of imports, suggest the need for devaluation to support exports and discourage imports.
The recent appreciation to 98.6 followed the domestic currency strengthening to Rs 281.47/$ by the end of October, compared to Rs 287.73/$ on September 28, 2023.
Analysts believe that these currency dynamics not only reflect short-term market sentiments, but also highlight the broader economic outlook. The positive stance of the IMF and the subsequent boost in foreign exchange reserves are contributing factors. However, experts recommend cautious optimism, stressing the need for continued economic reforms to ensure sustainable growth and stability in the foreign exchange market.
Published in The Express Tribune, November 21St2023.
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