JPMorgan anticipates short-term weakening of Pakistani currency

WEB DESK: JPMorgan analysts have projected a potential short-term weakening of the Pakistani rupee (PKR) despite a solid Balance of Payments (BoP) position.

This anticipated decline is linked to the final clearance of dividend repatriation backlogs, as noted in their latest report.

The analysts expect more favourable foreign exchange (FX) entry points in the near future, suggesting that the PKR is not currently overvalued.

However, they caution that informal restrictions on dividend repatriation may still be impacting the market, despite the International Monetary Fund (IMF) reporting the removal of all FX controls.

If these informal barriers are fully removed with the start of the Extended Fund Facility (EFF), the USD/PKR exchange rate might rise moderately in the coming months. Nonetheless, JPMorgan anticipates this rise to be short-lived due to the positive BoP dynamics.

The current market conditions are viewed as an advantageous time for bullish investments in treasury bills and bonds, especially with expectations of a significant rate cut by the State Bank of Pakistan (SBP).

Since the start of the year, the PKR’s Nominal Effective Exchange Rate (NEER) has appreciated, supported by stronger exports, steady remittance inflows, and a gradual return of financial inflows.

Although foreign currency restrictions may have previously dampened FX volatility, the IMF’s report from May confirmed the removal of these controls, effective from late January. This has led to a stable PKR with no notable premium in the informal market and a gradual rise in the import bill, suggesting controlled pent-up demand.

While the Real Effective Exchange Rate (REER) shows some overvaluation, it remains within reasonable limits and is expected to normalise as inflation slows. JPMorgan believes that any negative FX adjustments will be minor, provided the current account remains stable.

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