JPMorgan warns of temporary PKR depreciation despite strong economic conditions

Despite a robust Balance of Payments (BoP) position, Pakistan may experience a depreciation of the Pakistani rupee (PKR) in the near term due to the finalisation of outstanding dividend payments, according to a recent report from JPMorgan analysts.

The report suggests that while the PKR is not perceived as overly expensive, analysts are anticipating more favourable foreign exchange (FX) entry points.

They also noted that although the International Monetary Fund (IMF) has declared the removal of all FX restrictions, there could still be informal barriers affecting the repatriation of dividends.

Should these informal restrictions be fully addressed at the commencement of the Extended Fund Facility (EFF), it might lead to a moderate increase in the USD/PKR exchange rate over the coming months. However, analysts expect any such increase to be short-lived due to positive BoP conditions.

The current environment is seen as a promising opportunity for bullish trades in T-bills and bonds, especially with the anticipated large-scale interest rate cuts by the State Bank of Pakistan (SBP).

Since the beginning of the year, the PKR’s Nominal Effective Exchange Rate (NEER) has strengthened, reflecting improvements in the BoP, such as higher export revenues, stable remittance flows, and a gradual return of financial inflows.

Although some concerns persist over foreign currency restrictions that might have artificially dampened FX volatility, the IMF’s latest report from May confirms the removal of remaining FX controls as of late January. This has resulted in a stable PKR with no significant premium in the informal or parallel market.

Moreover, the import bill has increased only gradually, indicating limited pent-up demand. While the Real Effective Exchange Rate (REER) shows signs of potential overvaluation, it remains far from historical extremes and is expected to adjust downwards as inflation moderates.

Overall, JPMorgan believes that any negative FX adjustments are likely to be minor, provided there is no significant worsening of the current account balance.