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Pakistani Rupee Faces Potential Depreciation as IMF Loan Program Looms


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The Pakistani rupee has seen a slight recovery of 0.02% against the US dollar, reaching Rs285.35 in the interbank market. However, financial experts are predicting further depreciation of the currency as the revival of the International Monetary Fund (IMF) loan program draws near.

The IMF has reminded the government to fulfill three conditions in order to resume its $6.5 billion loan program. One of these conditions is reinstating the market-determined exchange rate. Prime Minister Shehbaz Sharif has engaged in discussions with IMF Managing Director Kristalina Georgieva to revive the stalled bailout package before it expires on June 30, 2023.

The IMF’s reminder regarding the exchange rate condition suggests that the government has recently strengthened its control over the exchange rate.

Tahir Abbas, Head of Research at Arif Habib Limited, expressed the difficulty in estimating the rupee-dollar parity if the market-determined exchange rate is reinstated. However, he cautiously projected a possible 5-10% depreciation of the rupee if the IMF condition is fulfilled.

A depreciation of this magnitude could push the rupee to a new record low of Rs300-310/$. On May 11, 2023, the exchange rate reached an all-time low of Rs299/$ in the interbank market due to increased political uncertainty following the arrest of former Prime Minister Imran Khan.

While the exchange rate has consolidated around Rs285/$ in the interbank market, the open market has witnessed a continuous downward trend, indicating government control over the rupee in the interbank market.

In the open market, the rupee dropped to a new all-time low of Rs312 against the US dollar, creating a record gap of nearly Rs27 between the interbank and open market exchange rates.

Ismail Iqbal Securities’ Head of Research, Fahad Rauf, stated that the widening gap between the two markets is one reason why the IMF reminded Pakistan of the condition for a market-based exchange rate.

Rauf further mentioned that if the IMF resumes its program before new external loans arrive, the rupee may depreciate to Rs305-310/$ in the interbank market. However, there is a possibility of partial recovery in the open market if Pakistan secures new foreign funding.

Discussions within domestic financial markets suggest that China and Saudi Arabia may provide new foreign deposits to Pakistan in the coming days and weeks.

The outcome of the FY2023-24 budget will be closely monitored, as its alignment with IMF recommendations would indicate a resumption of the loan program, which has been stalled since November 2022.

Despite previous failures to reach an agreement with the IMF, Finance Minister Ishaq Dar has instructed his ministry to share budget documents with the IMF, signaling a renewed effort.

Rauf expressed hope that the IMF would sign the long-awaited staff-level agreement with Pakistan before the program expires on June 30, 2023. A further delay may raise questions about the IMF’s credibility, as the government has already met several prerequisite conditions for the program.

Rauf also noted that the rupee may face pressure in June due to the repayment of foreign loans amounting to $3.7 billion, with foreign exchange reserves critically low at $4.2 billion.

Furthermore, historical trends indicate increased imports in June, which could further weaken the rupee.

A global news outlet previously reported that the fair value of the Pakistani rupee stands at Rs244/$ based on the real effective exchange rate (REER) matrix

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