Amir Khan

With the exchange rate around Rs287 on November 14, 2023, the burning question now is how the PKR-USD parity will fare in 2024 and what factors could deteriorate or improve this delicate balance. The Economist predicts a staggering Rs343, primarily due to the concerns about Pakistan's ability to bridge a financing gap of $21 billion. This alarming figure could impact reserves and trigger an adverse shift in the exchange rate. However, some argue that the gap might not be insurmountable given the potential for additional loan financing. The Foreign Direct Investment (FDI) proceeds might not exceed $1 to $2 billion, leaving a substantial gap to be filled by new loans, possibly around Rs$10 billion, Muhammad Afzal, Economic Advisor at the Planning Commission of Pakistan, told WealthPK. He said the argument rested on the assumption that Pakistan had already factored in the potential financing challenges in the existing exchange rate of Rs280. The analysis delves into academic considerations, such as the Real Effective Exchange Rate (REER) and other indicators, suggesting that theoretically, the exchange rate should not surpass Rs250.

Various factors, including interest rates, inflation, government debt, terms of trade, economic performance, recession, and speculation, contribute to this theoretical threshold. While this discussion refrains from a detailed examination of these factors, it culminates in a pivotal question: Will Pakistan, despite stringent corrective measures under the Stand-By Arrangement (SBA), transition into a recovery mode? He acknowledged that the $13 billion gap might not be insurmountable given the international and local environment. The key contention lies in enforcing corrective measures against the unofficial sector's demand for USD. If Pakistan manages to reduce the leakage of $16 billion, even by $5 billion, it can stabilize the exchange rate. He said despite the gap on the official side, estimated at a minimum of $10 billion, maintaining stability in the exchange rate hinges on curbing the demand for undocumented transactions. With cautious optimism, he highlighted that continued corrective measures and government enforcement could help the PKR trade at 250-275 against the USD in 2024. He said as the situation unfolds, all eyes are on Pakistan's ability to navigate these financial intricacies and chart a course toward stability.

Credit: INP-WealthPk