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Hold or remit? Pakistan rupee likely to weaken, set to fall below 86 against UAE dirham

Political turmoil in the country after the removal of the former government has exacerbated the economic condition in the country with inflation hitting record highs

The Pakistani rupee is set to weaken further in the coming months and is expected to fall below 300 against the US dollar despite Islamabad signing a loan agreement with the International Monetary Fund (IMF), said a new report.

According to the Institute of International Finance, the rupee, trading at around 288 (78.4 against the UAE dirham) on Wednesday evening, is likely to drop to 317 (86.4 versus dirham) in 2024 as the South Asian country could face a challenge in meeting its financing needs.

The rupee has weakened substantially in the past two years, falling from 162 in July 2021 to around 295 in May 2023.

The political turmoil in the country after the removal of the former government has exacerbated the economic condition in the country with inflation hitting record highs. Also, the country’s foreign exchange reserves have dropped substantially in the past two years before IMF approved the loan and the UAE and Saudi Arabia deposited funds with the central bank.

On July 12, the IMF approved $3 billion, providing much-needed external financial support. In addition, Saudi Arabia deposited $2 billion at the State Bank of Pakistan (SBP) while the UAE deposited another $1 billion. This resulted in Pakistan’s reserves doubling to around $8.7 billion, which is enough to meet 1.6 months of imports.

The South Asian nation also heavily depends on remittances sent by the country’s diaspora in the UAE, Saudi Arabia, Europe and the US. The remittances fell to $27 billion for the fiscal year 2023 as against $31.3. billion in the previous year.

IMF earlier painted a bleak picture of Pakistan's economy, also, saying, it “was buffeted by significant shocks over the past year. The severe impact of the floods, the commodity shock from the war in Ukraine, and the tightening of external and domestic financing conditions together with policy backsliding aggravated economic conditions and halted the post-pandemic recovery.”

IIF analysts said the additional financing provided by the IMF programme and the GCC deposits should help finance Pakistan through the election, which will most likely occur in mid-November.

“Market participants have reacted positively to the news, with Pakistan’s April 2024 bond rallying from around 50 cents on the dollar in late June to over 80 cents. Emerging markets bond index (EMBI) spreads have also narrowed substantially, from around 3,500bps to 1,900bps,” said Ivan Burgara, senior research analyst for Mena, and Garbis Iradian, chief economist for Mena at IIF.

IIF sees the narrowing of spreads after funds from IMF and friendly countries as a positive development in the short term, but it remains wary of Pakistan’s financing needs for the 2023-24 fiscal year.

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