Rupee likely to remain stable, Pakistan's foreign reserves to rise to 3-year high by end FY25

Pakistan's economy is gradually stabilizing under the new International Monetary Fund (IMF) program as its external accounts are showing substantial improvement, inflation is coming down sharply, and fiscal accounts are consolidating. However, growth is expected to remain modest on the back of lower agriculture growth.

Shankar Talerja, a senior analyst at Pakistani brokerage house Topline Securities, stated in a report that the country's external net repayments — net of rollover and refinances — are expected at $10 billion for fiscal year 2024-25 (FY25), according to a comment from the central bank governor during an analysts' briefing.

"With current account deficit expectations of $1.3 billion for FY25, the gross financing requirement (net of rollover/refinances) is expected at $11.3 billion — a manageable amount," the report stated.

An IMF document shows that Pakistan's gross external financing requirement is at a nine-year low of $18.8 billion in FY25.

Improved credit ratings

As a first sign of external stability, two rating agencies have already upgraded Pakistan's rating by one notch.

First, Fitch Ratings upgraded Pakistan’s long term issuer rating by one notch to CCC+ in July. A month later, Moody's Investors Service upgraded Pakistan to Caa2.

"We expect Pakistan's rating to further improve going forward on the back of rising foreign exchange reserves, resultantly opening doors for issuance of long-term instruments in international capital markets in next few years", the senior analyst said.

Rising foreign reserves

Pakistan's foreign exchange reserves are expected to touch the $13 billion-mark by June 2025, the first time since March 2022 due to successful completion of previous Standby Arrangement (SBA) and start of a new IMF program which is likely to open more funding from bilateral and multilaterals.

The report pointed out that the Pakistani rupee has appreciated 2.6% in FY24 and 0.3% in FY25 so far against the US dollar on the back of external account stability and higher inflows.

"We expect PKR-USD [parity] of 277-282 by June 2025 and 295-300 by June 2026," the report stated.

Declining inflation

Inflation during FY25 is expected to average 7-8% after recording 23.4% in FY24. The sharper decline in inflation rate is attributed to higher base effect, faster disinflation in food segment and negative fuel cost adjustments in Sept and Oct this year.

As a result, Topline expects the country's policy rate to come down to 12.5-13.5% by June 2025 from current level of 17.5% and peak of 22% in June 2024.

The six-month Karachi Interbank Offered Rate (KIBOR) and six-month treasury bills, in anticipation of further decline in interest rate, are at 13.43%, and 12.87%, respectively, 407-463bps below policy rate vs. last five-year average spread of 62bps and 46bps for KIBOR and T-bills above the policy rate.

Pakistan's real GDP growth is expected around 2.5-3.0% in FY25 despite muted growth in agriculture amidst weak cotton and wheat crop outlook. Growth is likely to be led by services sector on the back of gradual resumption in economic activities.

Agriculture sector after posting a 19-year high growth of 6.4% in FY24, is expected to post 1% growth as major crops are expected to show contraction of 8.1% based on the poor outlook of cotton and wheat crop..