Rupee overvalued, July depreciation seen: experts

KARACHI: The rupee is expected to remain stable in the near-term, but a surge in imports is likely to put pressure on the currency, leading to a depreciation starting in July, experts said.

This week in the interbank market, the local currency saw slight fluctuation against the US dollar. The rupee ended at 278.29 on Monday; however, it concluded the week at 278.21 on Friday, having slightly increased.

Citing the experts' opinions at the Financial Markets Association (FMA) panel discussion held on Friday, financial terminal Tresmark said that there was a consensus that "if the economy grows, import pressure will rise

and exert pressure on the external front".

"The rupee may see a monthly depreciation of Rs2-3 per dollar from July onwards."

Tresmark said almost all experts agreed that the rupee is marginally overvalued. "The currency would be way lower had there been no import and capital restrictions," it added.

The International Monetary Fund’s report on currency also implies that the rupee is overvalued.

“There was a whisper that overreliance on a real effective exchange rate may not be a good gauge, as it largely revolves around the base year paradox,” said Tresmark.

Pakistan is amongst the lowest in export-to-GDP ratio, with comparisons drawn to Vietnam, Thailand, India, and Bangladesh and that competitive devaluation should be embraced to let exports grow.

Pakistan’s import-to-GDP ratio is also amongst the lowest, indicating productivity is the issue and perhaps not the currency. "Compared to the peers mentioned, the rupee has deprecated three times more than the currency of those peers, which kind of negates the premise of competitive devaluation," Tresmark said . The rupee/dollar parity went from 105 (2017) to 280 (2024).

Going forward, it appears that a measured and consistent depreciation of the currency will be required, it added.

Market watchers are also keeping an eye on the rupee's position if Pakistan is successful in securing a new bailout from the IMF. It is anticipated that in July, a staff-level agreement with the IMF over the new programme will be reached.

On Friday, the IMF said Pakistan has made significant progress towards reaching a staff-level agreement for an extended fund facility (EFF).

The IMF started talks with Pakistan on a new loan programme after Islamabad last month concluded a short-term $3 billion loan programme that helped prevent a sovereign debt default.

After arriving in Pakistan on May 13, an IMF team led by mission chief Nathan Porter wrapped up talks with the government on Thursday.

“Building on the economic stabilization achieved through the successful completion of the 2023 Stand-by Arrangement, the IMF and the Pakistani authorities made significant progress toward reaching a Staff Level Agreement (SLA) on a comprehensive economic policy and reform program that can be supported under an Extended Fund Facility (EFF),” it said in a statement.

“The mission and the authorities will continue policy discussions virtually over the coming days aiming to finalise discussions, including the financial support needed to underpin the authorities’ reform efforts from the IMF and Pakistan’s bilateral and multilateral partners.”