KARACHI: The election period is challenging for the government to maintain the exchange rate since the political uncertainty would cast its shadow over it, said financial experts.

“Pakistan has somewhat salvaged the cash flow crises, courtesy of IMF’s fresh tranche, but navigating around the election period will prove to be a challenge,” said Tresmark CEO Faisal Mamsa.

There are lots of positives in the first few days of the new year including improved remittances, prospects of current account surplus, seriousness in privatisation and tax reforms, etc. Markets are calmer with price action in the bond markets reflecting a cut in interest rates, a rally in Eurobonds and a stronger rupee.

“But what happens in the next couple of months is anyone’s guess, some of which can be reflected in Pakistan’s CDS (Credit Deposit Swap) which though lower is still amongst the most elevated in the world,” he said.

The exchange rate, inflation and interest rate remained top of the agenda of discussions in the financial sector. Most of the speculations remained around the general elections scheduled to be held on Feb 8.

The rupee is expected to strengthen around Rs280 against the dollar in the interbank market. It was witnessed the appreciating PKR has compelled exporters to sell their holdings and whatever they would earn in the coming days and weeks.

One of the main reasons for the rupee strength was the inflows of export proceeds which provided enough support to the interbank market.

The main driver was exporters selling dollars in forward in large volumes. This was further accelerated by stronger SBP reserves and IMF’s approval for the release of $700m tranche. From the price action last week, analysts are of the view that the central bank is supporting the Rs280 level and any time it trades below it may only be temporary. Even during the last period of rupee consolidation, the dollar remained below Rs280 for only 12 days.

“We expect the local currency to be anchored around the Rs280 level till before the elections with temporary outruns on both sides,” said Mr Faisal.

Bankers said despite stability in the exchange rate, the confidence of overseas Pakistanis in the economy is shaky. The inflow of remittances increased year-on-year by 13.4pc in December 2023 but declined 6.8pc in the first half of 2023-24. So far the caretaker government has not paid attention towards the declining remittances despite making an effort to increase the foreign exchange reserves of the country through borrowing from multilateral lending agencies.

Published in Dawn, January 14th, 2024