The pressure from imports is gradually intensifying. The payment squeeze situation has persisted since January, becoming somewhat of a new normal. However, growing anxiety is now contributing to the depreciation of the Pakistani Rupee (PKR). "Dollars aren't short, just expensive," asserted a bullish treasury officer in defense of the State Bank of Pakistan (SBP). "There’s no panic in the market."
However, sentiments vary among banks. "For us, it’s panic," lamented a senior executive from another bank experiencing significant strain. "We are settling oil L/Cs at PKR 287-288, as we have to offer better rates to attract remittances." He anticipates that the currency will inevitably slip further.
These mixed sentiments among bank treasuries stem from implicit intervention by the SBP, a practice ongoing for over a year. The SBP buys surplus dollars from banks while restricting access for banks in need, forcing them to seek additional inflows to manage their outflows. "SBP is metaphorically holding a gun to our heads," expressed a frustrated executive from an affected bank.
Conversely, the optimistic banker supports the central bank's stance: "SBP is calm and composed, so there's no need for panic. Soon, SBP reserves will reach $14 billion, positively impacting the PKR and halting further depreciation," he explained.
Yet not everyone is convinced. "There’s a limit to how long the SBP's strong-arm tactics will work. Natural market forces will eventually prevail," another banker cautioned.
While extreme views exist, most treasury officials maintain a cautious outlook. The consensus is that interest rates have bottomed out, aligning with inflation trends. If further cuts occur, they will not exceed 100 basis points from current levels. No one anticipates single-digit interest rates, and a gradual depreciation of the currency seems inevitable.
"Previously, SBP allowed depreciation at 5 paisas daily; now it’s 15 paisas daily. This measured strategy prevents panic while managing currency depreciation effectively," remarked a third banker. This approach appears prudent, as there is currently no pressure in the open market, nor signs of a currency run. Importers remain steady, and exporters continue to exercise caution.
"Remittances are crucial," noted another banker. "If the country maintains strong inflows, the market will function smoothly." However, the current budget lacks explicit support measures for remittances. Although absent from the budget document, the finance minister has reassured banks of continued support. The SBP Governor recently echoed this sentiment, confirming continuity in some form.
The situation should soon clarify, but without robust support for remittances, currency pressures will likely accelerate. The Real Effective Exchange Rate (REER) stands between 97-98, indicating that the PKR is not overvalued. Crucially, SBP reserves are down to $9 billion, although the SBP Governor projects they will reach around $14 billion by the end of June. For now, optimism is cautious, and fingers remain crossed.