The Pakistani Rupee is anticipated to strengthen by over Rs. 55 or 20 percent in the forthcoming months, potentially reaching as high as 220 against the US Dollar, up from the current level of 277.9/$.

This positive outlook is attributed to the real interest rate turning positive for the first time in three years. A recent report by Goldman Sachs highlighted the potential for PKR’s recovery with positive interest rates, contingent upon a decline in inflation. According to an ex-senior central bank official, who preferred to remain anonymous, real interest rates could push the PKR to the 220-230 range by early 2025. The decreasing trend in inflation enhances the prospect of higher real positive interest rates in the future. It is anticipated that the State Bank may soon reduce its key lending rate, further boosting the real positive rate and reducing the real cost of Pakistan’s debt financing.

However, there are mixed views on the matter. Some believe that disinflation and possible lending support from the International Monetary Fund (IMF) could bolster real interest rates and the rupee. Nonetheless, concerns linger regarding short-term rollover arrangements with other creditors, which could have adverse effects.

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On the other hand, some traders foresee challenges ahead. They anticipate a worsening balance of payment crisis due to potential supply constraints in the global oil markets. Importers, particularly, are facing pressure, evident from the significant increase in Pakistan’s import bill in March 2024. This surge in imports, coupled with inflation, has compelled importers to hold onto dollars, awaiting better exchange rates.

Looking ahead, foreign factors are expected to continue influencing the PKR trend in 2024. The performance of Pakistan’s dollar bonds is also anticipated to improve, contingent upon the country adhering to a new IMF program, likely to be offered before the end of April 2024. However, this may entail reforms such as further hikes in fuel and electricity rates.

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