As Sri Lanka’s currency soars, will the Pakistani rupee follow?

Sri Lanka’s currency has been one of the best performers in 2023. According to TradingView, the USD/LKR was trading at 320 on Friday, meaning that the Sri Lankan rupee has jumped by 13% this year. It was last in this level in March 2022.

Sri Lanka IMF bailout

The main reason why Sri Lanka’s currency has done well this year is that the International Monetary Fund approved $3 billion bailout funds. In a statement, the agency said that these funds would go to support Sri Lanka’s economic policies and reforms while restoring macroeconomic stability., 

The new bailout came as Sri Lanka’s economy has struggled in the past few years, mostly because of the large loans from China. As a result, the country faces unprecedented low levels of forex reserves while inflation jumped to a record high. 

Analysts believe that the recent gains of the Sri Lanka rupee will be short-lived as the impact of the bailout sink in. In a statement, analysts at Fitch argued that the currency will lose a fourth of its value by the end of the year. They expect that the rupee will plunge to 390 later this year. The report noted that:

“Sri Lanka still has significant external debt repayment needs and will need to build up its foreign reserve buffer over the coming months, which would put downside pressure on the exchange rate.”

Will the Pakistani rupee jump?

The rebound of the Sri Lanka rupee bodes well for the Pakistani rupee, a currency that is trading at the lowest level on record. The USD/PKR was trading at 283.50 on Friday, meaning that it has jumped by more than 55% in the past 12 months. 

Pakistan finds itself in a similar place to Sri Lanka as it negotiates with the IMF on a bailout. The IMF is considering unlocking $6.5 billion in funds to help the country avoid a default. It needs to access these funds in June this year.

To release the money, Pakistan needs to convince the Washington-based agency that it is committed to reforms, including on energy subsidies. 

Analysts believe that Pakistan will ultimately implement these policies to avoid a default. If this happens, we could see the Pakistani rupee strengthen in the short term. I expect the USD/PKR to drop to the key support level at 260.