Islamabad May 19 2023: Pakistan's rupee is undervalued by about 14% as its fair value is 244, according to Bloomberg model.
Confidence in the currency soared due to delays in aid from the International Monetary Fund and clashes between the government and opposition leader Imran Khan, who was jailed on corruption charges on May 9. Bloomberg expect the turbulence to pass and the rupee to rebound close to our estimate of fair value after October, when elections should help restore order.
The rupee has traded in the range of 280 to 285 per dollar since March. It's at about 285 now.
Fair value is around 244, according to Bloomberg model - which measures the change in real effective exchange rate required to bring the current account deficit in line with long term trends.
Poor sentiment has depressed the rupee’s value. Bloomberg expect the IMF to deliver the aid by June and for the country to hold orderly elections by October, helping stabilize the government and investor confidence - and clearing a path for the currency to recover.
Pakistan's debt crisis makes it even harder than normal to estimate the rupee's fair value. This is because dollar shortages and import restrictions have artificially lowered the current account deficit. To smooth this out, Bloomberg analyst have used the average value across multiple time frames as their estimate.
Why Pakistan Currency is Weak
Capital is fleeing Pakistan because there is a growing risk that the IMF will not deliver a bailout, which is needed for the country to avoid default in the fiscal year starting from July. Aid has been stalled since November.
Political unrest is probably one of the reasons the IMF is baulking.
The country's leadership has been unstable since Khan was ousted as prime minister in a no-confidence vote in April 2022. Khan's arrest this man. (he was released after one day) has escalated the face-off between him and the government as well as the army.
The rupee plunged to a record low of 299 per dollar after Khan's jailing, but recouped itr losses and settled back at 285 after his release.
The currency will likely fall further if Khan and the government continue to clash and/or if the IMF chooses not to provide loans.
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