What would happen if the PKR appreciated to 250 per dollar?

Pakistan's economy is at a crossroads is a phrase every Pakistani has heard and heard often.

However, it has slowly been improving since last year when the government took steps to secure a $7 billion loan program from the International Monetary Fund.

Foreign exchange reserves, which fell so low in 2023 that they did not cover even a month's imports, have risen to more than $11 billion. State Bank of Pakistan Governor Jameel Ahmad recently revealed that the central bank has bought nearly $9 billion from the market to help build up the reserves.

If the central bank had not bought these many dollars from the market, the rupee would have appreciated by a bigger margin.

Nukta contacted several analysts to ask a simple question — if the dollar appreciated to PKR 250, what will be the impact on the country's economy and key indicators?

Here's what they said:

Easing inflation, reduced import bill, lower debt

While inflation is drastically down from a record high of 38% in May 2023 and is expected to be 3% in January, an appreciation in the rupee's value would bring it even lower. This is because as an import-dependent country, Pakistan would have to pay less for everything it buys from abroad.

However, it wouldn't have any impact on external debt, as these are funded from dollar earnings, and exchange rate fluctuations make no difference.

A stronger rupee would also result in lower electricity tariffs — since electricity generated from imported sources would become cheaper — cheaper fuel and an average reduction of 10% in prices of imported items, according to Muhammad Awais Ashraf, director research at AKD Securities.

However, this appreciation could also have a downside, according to Ashraf, as it could stimulate demand, increasing import pressures and straining the balance of payments.

Ali Nawaz, CEO of Chase Securities, said the impact would depend largely on how the rupee appreciates. If the PKR is artificially controlled to keep it at a certain level instead of adhering to a flexible market-based exchange rate, it would create distortions, erode investor confidence, and lead to inefficiencies, he commented.

"A robust export base, supported by competitive industries and favorable trade policies, would naturally strengthen and stabilize the currency over time. At PKR 250, which is stronger compared to the current rate of around PKR 280, inflationary pressures could ease as the cost of imports, including essential commodities like fuel and raw materials, would decline."

"This would provide relief to consumers and reduce production costs for businesses, potentially improving profit margins and stabilizing prices in the domestic market."

Saad Hanif, head of research at Ismail Iqbal Securities, also said an exchange rate of PKR 250 per dollar would result in improved profit margins for industries relying on imported raw materials and increased investor confidence.

"If the dollar prices PKR 250 in Pakistan, it could benefit consumers and businesses that rely on imported goods such as oil, machinery, electronics, and raw materials, leading to lower costs for these products in the Pakistani market," according to Jibran Sarfaraz, Equity Dealer Munir Khanani Securities.

Less competitive exports

However, not everything would be rosy. Hanif pointed out that a stronger rupee would make Pakistan's exports less competitive since buyers abroad would have to pay more for its products.

"Export-oriented industries might face reduced margins due to less favorable exchange rates," he said.

"If the rupee's appreciation is driven by one-off factors rather than sustainable economic improvements, it could lead to instability later," he further cautioned.

Similar thoughts were expressed by Abdul Azeem, head of research at Al Habib Capital Markets. He noted that while the rate of 250 would reduce the trade deficit and improve people's purchasing power, boosting the economy, it would reduce the rupee value of remittances that have risen steadily in recent months.