As the Sri Lankan currency soars, will the Pakistani rupee follow?
Invezz.com – The Sri Lankan currency has had one of the best results in 2023. According to TradingView, the was trading at 320 on Friday, which means that the Sri Lankan rupee is up 13% this year. It was the last at this level in March 2022.
Sri Lanka IMF bailout
The main reason why the Sri Lankan currency has performed well this year is that the International Monetary Fund approved $3 billion in bailout funds. In a statement, the agency said these funds would go towards supporting Sri Lanka’s economic policies and reforms while macroeconomic stability is restored.
The new bailout came as Sri Lanka’s economy has struggled in recent years, mainly due to large loans from China. As a result, the country is facing record low levels of foreign exchange reserves, while inflation has jumped to an all-time high.
Analysts believe that the Sri Lankan rupee’s recent gains will be short-lived as the impact of the bailout sinks in. In a statement, Fitch analysts argued that the currency will lose a quarter of its value by the end of the year. They expect the rupee to plummet to 390 by the end of this year. The report noted that:
“Sri Lanka still has significant external debt repayment needs and will need to increase its foreign exchange reserves in the coming months, which would put downward pressure on the exchange rate.”
Will the Pakistani rupee jump?
The Sri Lankan rupee’s rally bodes well for the Pakistani rupee, a currency that is trading at its lowest level on record. The was trading at 283.50 on Friday, which means it is up more than 55% in the last 12 months.
Pakistan is in a similar place to Sri Lanka as it negotiates with the IMF for a bailout. The IMF is considering unlocking $6.5 billion in funds to help the country avoid a default. You need to access these funds in June of this year.
To release the money, Pakistan needs to convince the Washington-based agency that it is committed to reforms, including energy subsidies.
Analysts believe that Pakistan will eventually implement these policies to avoid a default. If this happens, we could see the Pakistani rupee strengthen in the near term. I expect the USD/PKR to fall to the key support level at 260.
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