Pakistan’s rupee shows minor slip as reserves fluctuate

Pakistan's rupee remained relatively flat for most of the ongoing fiscal year, slipping only 0.64% in the first nine months. The currency weakened slightly from PKR 278.38 per U.S. dollar on July 2, 2024, to PKR 280.16 on March 28, 2025.

Despite higher external repayments pushing the rupee to a 14-month low of PKR 280.46, the currency rebounded following a Staff Level Agreement (SLA) with the International Monetary Fund (IMF). This agreement unlocked a $1 billion tranche from the Extended Fund Facility (EFF) and $1.3 billion for climate resilience projects.

Strengthened Reserves Aid Stability

Foreign exchange reserves held by the State Bank of Pakistan (SBP) surged past $11.2 billion before declining to $10.6 billion as of March 21, 2025, due to external payments. An Arif Habib Limited analyst noted that the central bank effectively stabilized the rupee despite profit repatriation by foreign investors.

In fiscal year 2024, $12 billion in external repayments were made, with an equal amount rolled over. For fiscal year 2025, debt repayments are projected to reach $26.1 billion, with expectations of rolling over $16.4 billion, leaving a net repayment of $3.7 billion.

Analysts expressed optimism about Pakistan’s ability to attract inflows from multilateral and bilateral lenders following IMF disbursements.

Strategic initiatives, including efforts to boost foreign direct investment, increase exports, and re-enter international capital markets, are expected to further strengthen the external account. SBP reserves are projected to reach $13 billion by the end of FY25.

A key factor in the rupee’s recovery has been the IMF’s nine-month Stand-By Arrangement (SBA), which provided essential policy support to stabilize the foreign exchange market. Government measures, including removing multiple currency practices and easing restrictions on import advance payments, have also contributed to the rupee’s stabilization. The currency rebounded by 4% in FY24 after depreciating by 23% and 28% in FY22 and FY23, respectively.

Trade Deficit Widens Amid Increased Imports

During the first eight months of FY25, Pakistan’s import bill rose 8%, reaching $37.9 billion due to higher machinery and textile imports, while petroleum imports remained flat. Meanwhile, exports increased by 8%, totaling $22 billion, bolstered by gains in the food and textile sectors. However, the trade deficit widened to $16 billion.

Private sector credit expanded to PKR 13 trillion, reflecting an 18% increase compared to June 2024. Manufacturing and textile loans also saw growth of 10% and 14%, respectively.

Monetary Policy and Economic Outlook

In its latest statement, the SBP's Monetary Policy Committee highlighted several key challenges. The current account turned to a $0.4 billion deficit in January 2025 after months of surplus, weakened financial inflows, and ongoing debt repayments. Large-scale manufacturing output declined during the first half of FY25, while tax revenues fell short of targets.

Despite these challenges, consumer and business sentiments showed improvement. Globally, economic uncertainty persists due to tariff escalations, potentially impacting trade and commodity prices.

Looking ahead, analysts forecast the USD/PKR exchange rate to hover around PKR 285 in June 2025 and PKR 293.6 in December 2025. Rebuilding reserves remains a priority, with multilateral and bilateral loans, along with foreign exchange purchases, supporting the effort.

The SBP has committed to allowing flexible exchange rate adjustments to address outflow pressures while refraining from interventions against depreciation trends. Improved foreign exchange market conditions and minimized interbank-open market spreads have enabled substantial reserve accumulation, doubling SBP’s reserves.