PKR Was Kept Undervalued Adding Nearly 7% Inflation; Report Estimates

The fair value of the Pakistani Rupee (PKR) is estimated at 249.2 per US dollar, instead of 282.2 per US dollar, according to a report by Tola Associates.

This estimation considers the current account balance for the period of July-April FY25. The report suggests that the PKR is being artificially kept undervalued, as its current market value is around 249.9 per US dollar, while the official rate is significantly higher at 282.2 per US dollar.

There are multiple possibilities to, why the rupee stayed undervalued. According to the report, there are four possible scenarios;

• The valuation as of June 30, 2024,
• Based on the actual current account deficit (CAD) of $665 million for FY24
• Following the government’s projected CAD of 0.9% of GDP, and
• An adjusted CAD projection for the April FY25 period.

Some older reports also suggest that this undervaluing was because of the IMF’s condition that kept the Dollar overvalued to maintain a market-based exchange rate.

Tola Associates also highlighted the inflationary impact of currency depreciation. Statistically, a 10-rupee depreciation in the PKR typically leads to a 2% increase in inflation. As the rupee was undervalued by over 33 rupees, it added almost 7% in inflation. It shows the direct relationship between the currency’s value and the country’s economic stability, and how price levels impact the whole economy