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The currency appreciation continues, crossing the psychological level of 155 on Friday. This is almost the pre-Covid days level (154.27 on 5th March 2020). Better external flows and improved economic sentiments seem to be driving currency appreciation. During pre-Covid times, currency was slowly appreciating after reaching a new low at 164.1 in June, 2020. After the Covid, it hit a new low of 168.4 in August 2020.

Pak Rupee’s depreciation against US dollar and other currencies during early Covid days was not unique in emerging economies – especially the troubled ones – such as Egypt and Turkey. Rupee depreciation in peak panic Covid days was in fact lower than many other economies, as some are still depreciating.

In 2019, macroeconomic adjustments were a little too harsh – taking interest rates to 13.25 percent and PKR/USD to 164 stretched things tad too much in hindsight. At that time, based on REER, external accounts and other factors, the PKR/USD value of 145-150 could have been a decent level given that currency was kept artificially overvalued in prior years (2016-18).

That was the inertia of keeping it too high. Then slowly it started coming back to its fair value, before Covid hit. At that time, the buzz was that the Pak Rupee should be somewhere around 145-150. That was the level which IMF was comfortable with as well, as demand curtailment at that level was deemed sufficient. That was enough for local industries to compete with imports and exporters to be competitive with regional players.

After a few months of Covid, and after the evaporation of hot money, the currency started appreciating in September 2020. The following improvement in current account position is now well established. The 8MFY21 is in surplus and the current account is likely to be in balance during March 2021.

Remittances are growing at an excellent pace. That is a Covid surprise. Central and commercial banks are trying to keep the newcomers (from informal sector) in the formal. SBP has opened a new avenue of Roshan Digital Account (RDA). The flows have picked pace in the last 8-10 weeks and the currency has kept on appreciating in that very period.

The momentum is ongoing – both remittances and RDA is growing. IT related exports and other current transfers have improved as well. There is a chance that these inflows will keep on coming from formal channels. And there is a genuine reason for IT exports to grow as well.

There are changes in the foreign exchange manual which will improve the sentiments of venture capital and other foreign investors. The uncertainty on the energy prices may soon end – though with autonomy of NEPRA - tariffs shall move up. But with the chance of circular debt flow to stem, many investors may find encouragement.

The interest rates have a role to play. When the rates moved up to 13.25 percent, there was a sharp conversion of foreign currency into Pak Rupee. Then when the rates came down in response to Covid, the currency took a natural hit. Though, the policy rate has kept unchanged since Jul 2020, after Nov 2020 the market rates started moving up – higher increase was in the long-term rates. And lately, in the last two months, the short-term rates have moved up too.

In the latest T-Bill auction, the 3M cutoff is 54 bps higher than the policy rate and 6M paper at 80 bps higher. Though, the bond yields have come down a bit after SBP gave more clarity on the forward guidance i.e., the rates increase will likely be what the SBP calls “gradual and measured”.

Despite this messaging that policy rate may well remain in single digits (it may hover between 7-9 percent in the next 1-2 years), the currency appreciation continues. That is showing the strength of the external account. With REER at 95 and IMF progarmme back in action, the sentiments have improved further.

The inflows usually improve right after the IMF and that may help currency to further appreciate. After witnessing the level of REER at 95, exporters came in chunk to sell dollars. Now another psychological barrier has been crossed, there might be more forward selling by exporters – that may appreciate currency further.

Having said that, the pick-up in imports is very much on the cards. Oil prices are hovering high. One thing or the other is not letting oil to tame. The economic activities at home are picking up and soon these will reflect in imports. With the stated policy of not taking rates too high, currency will be a neutral buffer to curb demand. Before that happens, the party of appreciation may continue – the next critical level is 150.

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