The rebound in the Pakistani rupee, which has gained around 4% against the US dollar since last week’s election, is likely to prove fleeting. The exact trigger behind the surprise jump in the currency is unclear, but it has been linked to rumours that China has agreed to lend Pakistan a further US$2bn to help shore up its foreign exchange reserves. However, given its rapidly deteriorating external position, the loan from China is likely to prove nothing more than a stopgap. We think Pakistan will need the assistance of the IMF sooner rather than later. As the price for its support, the IMF is likely to demand a significant tightening of fiscal and monetary policy, as well as the adoption of a floating exchange rate regime. Our forecast is for the currency to reach 140 rupees to the US dollar by the end of the year (a 14% fall).
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