Pakistan to Slow Dollar Buying, Reduce Rupee Pressure, Citi Says

Citigroup reports the State Bank of Pakistan is moderating its dollar accumulation pace to alleviate pressure on the rupee, a strategic adjustment that has already improved interbank market liquidity. While the central bank continues to build crucial external reserves, which remain low despite improvements from early 2023, this slower approach aims to balance reserve building with currency stability, according to Citi's emerging markets economist Katie Kironde.

Analysis

The State Bank of Pakistan is strategically slowing its accumulation of US dollars to alleviate downward pressure on the rupee, according to an analysis by Citigroup Inc. This policy adjustment has already yielded a tangible benefit by improving liquidity in the interbank market. While Citi's emerging markets economist, Katie Kironde, welcomes the central bank's continued efforts to build its dollar stockpile, the note highlights that external buffers remain low despite having improved from their early 2023 lows. The central bank's action represents a tactical shift to balance the critical long-term need for reserve accumulation with the immediate necessity of maintaining currency stability and market function.

Key Decisions for Investors

• Investors should anticipate reduced near-term volatility in the Pakistani Rupee (PKR) following the central bank's decision to slow its dollar purchases, potentially creating a more stable environment for FX-exposed positions.
• The improvement in interbank market liquidity is a positive signal for the domestic financial system; this may warrant a review of positions in Pakistani equities or local currency debt.
• While the policy shift is a near-term positive, the underlying risk of low external reserves persists, requiring investors to closely monitor Pakistan's reserve adequacy reports for any signs of renewed strain.