Despite Pakistan’s Balance of Payments being in a strong position, JPMorgan analysts anticipate a short-term weakening of the PKR due to the final clearance of dividend backlogs, according to their latest research report.
The analysts suggest that, while the PKR is not considered overly expensive, they are awaiting more favorable foreign exchange entry points.
Although the International Monetary Fund has indicated that all foreign exchange restrictions have been lifted, JPMorgan notes that there might still be some informal barriers to the repatriation of dividends. If these barriers are removed at the start of the Extended Fund Arrangement (EFF), it could cause the USD/PKR exchange rate to rise slightly over the coming months.
However, the report suggests that any such increase is likely to be temporary due to the positive BoP dynamics. Analysts see this as a good opportunity for bullish T-bill and bond trades, particularly ahead of a potential large interest rate cut by the State Bank of Pakistan.
Since the beginning of the year, the PKR’s Nominal Effective Exchange Rate has appreciated, reflecting improved BoP conditions, including stronger export gains, resilient remittance inflows, and the gradual return of financial inflows. Although lingering foreign currency restrictions have suppressed FX volatility, the IMF’s May report confirmed the removal of the last remnants of FX controls, effective end-January.
Since then, the PKR has remained stable, with no significant premium in the informal market and a gradual rise in the import bill suggesting limited pent-up demand. While the Real Effective Exchange Rate shows some overvaluation, it is not at extreme levels and is expected to normalize as inflation moderates.
Overall, JPMorgan believes that any negative FX adjustments will be minor, provided there is no significant deterioration in the current account.
