Persistent Exporter-Driven Pressure Affects Pakistani Currency
Despite the ongoing currency challenges, the overall economic sentiment remains positive. Both the stock market (PSX) and the bond market have displayed bullish trends. Notably, PSX is performing at an all-time high, and secondary market bond yields are decreasing, even though the State Bank of Pakistan (SBP) has maintained an unchanged policy rate.
Business Recorder 
In recent days, the Pakistani currency has faced continuous downward pressure, with gradual depreciation observed each day. Since October 16th, the currency has depreciated by 2.9 percent, reaching a closing rate of PKR/USD 285.3 yesterday. While several factors contribute to this depreciation, including payment pressures, there are promising indicators in Pakistan's financial landscape.
Pakistan's balance of payments is showing improvement. Remittances are expected to record double-digit growth compared to the previous month, and the current account is likely to be in surplus. These positive developments align with the expectations of a successful International Monetary Fund (IMF) review.
So, why is the currency market still experiencing a bearish trend? The answer lies in the aftermath of extensive forward selling by exporters. The Pakistani Rupee (PKR) had been appreciating daily from September 6th to October 16th. During this period, exporters engaged in substantial forward market selling, while importers awaited a halt in the PKR's appreciation.
However, on October 16th, the currency's direction reversed, and forward selling by exporters dwindled, leading to an influx of importers seeking to settle their payments. This lingering impact of the previous cycle continues to affect the market, although some exporters are still present in the forward market, albeit with reduced volumes.
Based on the current trajectory, it is anticipated that inflows may exceed outflows in the next 2-3 weeks. This expectation is reinforced by the likelihood of a surplus in the October current account, following a balanced current account in September.
Exporters may return to the forward market.
Several signs point toward stability in the bond and stock markets in the short run. This suggests that the currency market's payment pressure may ease, and as the PKR stabilizes and changes direction, exporters may return to the forward market, as many have until November. December could witness a more favorable environment for the currency.
The outcome of the ongoing IMF review, expected to conclude by mid-November, is also linked to the behavior of the currency market. The IMF has concerns related to pending repatriations of dividends and royalties, some of which were addressed during the PKR's appreciating period from September 6th to October 16th. During this time, the SBP reduced its forward liabilities by a billion dollars in September.
The appreciation of the currency during those six weeks proved beneficial in terms of clearing payments and reducing forward liabilities. Although there is currently some market inertia, this is likely to dissipate. If inflows resume, it could further alleviate payment pressures and reduce liabilities.
Boosting inflows is not within the SBP's control, as the central bank lacks the reserves to intervene actively in the market, given its role as a buyer during the PKR's appreciating phase. Instead, sentiment plays a crucial role, particularly after crackdowns on smuggling and hoarding have improved economic conditions. There are also indications of grey market flows resurfacing, possibly warranting a second round after the IMF review.
