SBP to Continue Dollar Accumulation at Calibrated Pace

The State Bank of Pakistan (SBP) will persist in increasing its dollar reserves, but will moderate the rate to prevent excessive pressure on the rupee, Citigroup Inc. has projected.

Citi’s emerging markets economist and macro strategist, Katie Kironde, noted that while reserves have recovered from their early 2023 lows, the central bank’s ongoing reserve accumulation is still welcome given the limited external buffers.

The central bank’s adjustment to its reserve strategy this week has contributed to improved liquidity within the interbank market, Kironde added.

Data from the central bank indicates that pressure on the Pakistani rupee has diminished over the last three trading sessions. However, the currency has depreciated by over 2% against the dollar year-to-date, underperforming most of its Asian counterparts. As of July 11, the nation’s foreign exchange reserves have increased by $23 million, reaching $14.53 billion.

On Friday, the rupee saw a 0.27% rise against the US dollar in the interbank market, closing at 283.45, which is a gain of Re0.77 from the previous day’s closing rate of 284.22. This upward trend has been evident throughout the week.

Currency market observers suggest that the rupee’s improved performance is partly due to a crackdown on foreign currency smuggling by law enforcement.

According to Malik Bostan, Chairman of the Exchange Companies Association of Pakistan (ECAP), the Federal Investigation Agency’s (FIA) actions against smugglers have led to a decrease in the dollar rate in both open and interbank markets. On Wednesday, the rupee strengthened by Re0.21 in the interbank market, settling at Rs284.76 compared to Tuesday’s Rs284.97.

Bostan mentioned that he headed a delegation that met with Director General Counter-Intelligence General Faisal Naseer at the Inter-Services Intelligence (ISI) headquarters.

Following the meeting, directives were reportedly issued to intensify the crackdown on currency smuggling, particularly along the Afghanistan and Iran routes.

Bostan stated that the supply of dollars to legal channels had been decreasing due to more favorable rates in the black market, adding that the smuggler mafia has retreated due to the crackdown. He also expressed optimism that if enforcement continues, the exchange rate could potentially decrease further to Rs270 or even Rs250.

The US dollar held steady near two-week lows on Friday, and the dollar index is on track for its worst weekly performance in a month. Additionally, rising oil prices, fueled by trade optimism and potential Russian gasoline export restrictions, provided further support to the rupee’s recent performance.

Financial conditions in Pakistan have seen improvement, with the central bank reducing the key policy rate by 500 basis points to 11% since the previous year in an effort to stimulate growth.

Pakistan has averted near-default conditions this year, with the government securing funds under International Monetary Fund programs and presenting a budget that reaffirmed its commitment to fiscal consolidation.