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The pressure on the PKR/USD is back due to geopolitical tensions and global travel reopening. The remittances growth momentum is checked with increase in the international travel from Pakistan. The slowdown in the real estate market is probably having an effect on the remittance. The bigger factor for PKR/USD pressure is oil prices which are flirting around $100 due to Russia Ukraine tensions.

This is happening in the backdrop of a slowing down economy which is lowering demand-led imports growth. PKR/USD was expected to appreciate after the IMF nod and lower than expected imports numbers in January 22 (PBS). It did appreciate a bit. But now it is back on a journey south. The key indicators to watch are oil and other commodities.

However, there is not much Pakistani authorities can do on the growing commodity price front. It’s not easy to make a call on the commodity prices. Its best to see the data and act based on the movement. The bird in hand is to slowdown the imports momentum using a combination of monetary and fiscal tools including the exchange rate. That seems to be happening. However, the slowdown would take time and imports will taper off gradually. Earlier signs can be seen from the decline in motorcycle sales. The situation would be clear from March and onwards. One can safely say that imports peaked in November and December. What’s to watch now is the gravity of the slowdown.

At the same time, the tapering off in growth of remittances and RDA are making the job of central bank difficult. The home remittances at $2.1 billion in January is the lowest since August 2020. The run rate in February seems similar. The 7MFY22 remittances are up by 9.5 percent to $18 billion. The story is still much better than Bangladesh where the toll is down 20 percent in 7MFY22. The growth picked up in tandem in both countries during 2020. With lockdowns imposed the informal flows diverted to formal channels. The challenge is to keep these in the formal sector. Then the spill over of global stimuli is losing heat along with those stimuli and that is hurting the remittances momentum as well. The slowdown in real estate market is attracting lesser expat flows in it.

Nonetheless, current account deficit may improve in January 2022. It could be a few hundred million dollars less than what was in December. And in February, the higher oil and other commodity prices to keep imports a bit higher. There is not much monetary tightening can do to counter this commodity spree. The monetary policy will be data driven. Expect no change in March. Inflation has peaked in January and would remain in double digits for a few months.

The key is to see the trajectory in 2HCY22. That will depend upon international commodity prices and their pass on (especially petroleum) to consumers. Times are tough. The resolve on structural reforms is a must. The PKR/USD is the first line of defense. And the fact that it is not appreciating is tantamount to depreciation and would keep demand in check. The call is to wait and see and keep a close eye on the building geopolitical tensions.

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