After nearly three months in office, the coalition government has achieved a significant milestone in a country plagued by inflation. Surprisingly, the new finance team has managed to stabilize the currency, albeit through interventions that have raised concerns.
According to a prominent Karachi-based currency dealer closely associated with the 2022 Finance Division, the manipulation of the PKR (Pakistani Rupee) continues. In 2022, commercial banks were implicated in manipulating the forex market for profit. Presently, the central bank is actively purchasing interbank dollars to control the PKR’s value, a strategy viewed with apprehension given imminent IMF disbursements and Saudi investments.
The PKR has not only halted its daily decline but has actually appreciated significantly against the US dollar, rising by 1.2% over the past three months, coinciding with the Special Investment Facilitation Council’s blue-chip era.
In a nation where the currency’s value has approached or exceeded 300 against the dollar, this achievement is remarkable. The current administration’s aggressive measures to curtail government expenditure, reduce demand for foreign currency, and address food inflation, which stands at nearly 27%, have evidently had an impact, although there are concerns about the long-term repercussions of these tactics.
Finance Minister Muhammad Aurangzeb recently forecasted a decline in inflation to single-digit figures by the end of 2025, a projection that some banking experts deem overly optimistic given the prevailing circumstances.
The currency dealer warned that Aurangzeb’s bold assertions about currency stabilization could backfire due to mounting political uncertainty, economic slowdowns, and ongoing forex market manipulation, jeopardizing his fiscal agenda. Furthermore, there is no assurance that inflation will abate as quickly as predicted, potentially impeding the PKR’s upward trend.
While the strengthened PKR may appear advantageous, it could adversely affect exporters and deter foreign investments. Certain sectors are reportedly feeling the strain of an artificially strong PKR, which undermines competitiveness. Nevertheless, the State Bank of Pakistan (SBP) cannot afford to let the rupee depreciate further, given the latest Real Effective Exchange Rate (REER) data.
Currently, the PKR remains stable at 278-279 against the US dollar, largely sustained by speculation and SBP’s dollar purchases to shore up reserves. This intervention is at odds with prevailing monetary trends, where many central banks are grappling with high inflation to protect their currencies against the dollar.
A regular open market trader highlighted that SBP’s continuous interventions exacerbate supply-demand imbalances. Confidence in the PKR has momentarily alleviated the demand for dollars, allowing the central bank to maintain a high-interest rate linked to inflation.
The transformation of the PKR’s fortunes, from being denounced as undervalued in 2022 by former Finance Minister Ishaq Dar to its subsequent decline below 300 in 2023, was remarkable. Aurangzeb’s current tenure as finance minister may overshadow this event, though the outlook remains uncertain due to political instability and mounting pressures that could lead to renewed currency volatility.