Asia's worst-performing currency to face another challenging year
What's the story
The Pakistani rupee might end up as Asia's worst-performing currency by 2023-end, with losses expected to continue into 2024.
So far, the currency has dropped about 20% against the US dollar this year. Experts predict that the currency will continue to decline.
BMI Research forecasts the currency to drop to 350 Pakistani rupees per US dollar by 2024-end and Karachi-based Topline Securities expects it to fall to 324 per dollar.
On Tuesday, the Pakistani rupee traded at 285.75 per dollar.
Details
Factors affecting the rupee's performance
John Ashbourne, a global economist at BMI in London, believes the Pakistani rupee is "set to adjust downwards," citing Pakistan's high inflation and trade deficit as contributing factors.
The country's high debt payments and external funding gap are also putting pressure on the currency.
Pakistan nearly defaulted this year due to decreased foreign investments and Asia's fastest inflation rate of around 31% as of October.
What Next?
IMF assistance and dollar shortage
To help Pakistan avoid default, the International Monetary Fund (IMF) agreed to a $700 million payout this month.
However, concerns remain that the country's economic challenges may persist into 2024, potentially requiring additional aid.
A dollar shortage could also lead to the re-emergence of parallel currency markets, which appeared last year after the central bank limited access to foreign currency to protect dwindling reserves.
Insights
Parallel markets and rupee devaluation
Ashbourne noted that "it'll be very hard in the long term to convince people to use the official rate if parallel markets give more value for a dollar."
He added that while authorities can resist the trend for a while, they cannot do so indefinitely.
Goldman Sachs warned that the market will continue to demand a premium for the rupee due to high interest costs and short-term arrangements with lenders.
Facts
Upcoming elections
As Pakistan prepares for national elections in February, Topline Securities expects the new government to sign a long-term program with the IMF next year, which could provide relief for the currency.
Topline Securities analysts wrote in a note this month that "Pakistan's external account vulnerabilities can only be addressed effectively through a new and bigger IMF program."