- December 27, 2025
- Posted by: Tresmark
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Tresmark: Who remembers 1998, when Pakistan’s currency market broke down?
The trigger was nuclear testing and the sudden pullback of external financing. The FX market melted, confidence evaporated and multiple exchange rates emerged. You may say that was an exceptional time.
But if we look at the major episodes that followed in 2008, 2018, and 2022, a clear pattern appears. What actually triggered past crises:
• Political instability and policy paralysis
• Oil price spikes and inflation surges
• Geopolitical shocks and IMF breakdowns
In each case, the initial trigger came from outside the FX market. The rupee was not the cause, it became the transmission channel.
Once these shocks hit, they exposed vulnerabilities that already existed:
• Elevated inflation, wide current account deficits
• Weak reserve buffers & slow interest rate adjustments
• Absence of credible IMF anchors
But exposure alone did not create a crisis. What followed determined the outcome.
Sentiment – How stress became crisis
The turning point came when sentiment deteriorated. As confidence weakened, flows slowed and expectations changed abruptly. The rupee’s behaviour at that stage became sentiment-driven, not valuation-driven. At that point, policy responses mattered enormously. Instead of allowing early adjustment, the response in all three episodes followed a familiar path:
• defend the rupee
• burn reserves
• delay decisive action
This combination transformed manageable stress into crisis, setting off speculative hoarding. By the time adjustment occurred, it was forced, disorderly, and credibility-destroying. This is why Pakistan’s FX history is marked by step devaluations, not smooth depreciation.
Why standard FX models fail for PKR
This history explains why models such as PPP, BEER, or even simplified REER frameworks struggle with PKR. They assume stable policy regimes, political stability and continuous calibration. But PKR operates in regime shifts, not smooth cycles.
Valuation matters in normal times. But at moments that define PKR’s trajectory, sentiment and policy dominate valuation. That is when these models offer false comfort.
Reserves – FX regime change
This brings us to the present framework. Under the current SBP regime, supported by the IMF, the focus of macro management has shifted. The rupee remains an important optic, but reserves now anchor policy credibility.
That implies three important changes.
– Periods of FX strength are used to rebuild reserves, not to signal stronger Rupee.
– SBP Intervene to smooth volatility, without defending a level or burning reserves.
– import compression and administrative measures are used to cool off surplus demand
This regime materially lowers the probability of a repeat of past devaluation episodes. But it also caps upside. The objective is to view the rupee through the lens of reserve strength, which, if maintained, can resist speculative pressure.
In this framework, reserves absorb shocks, remittances provide durable support to the external account, and import compression manages excess demand. Danda, through short-term administrative measures, is used to curb hoarding and speculative pressure.
– We saw trimming of imports last month that resulted in current account surplus
– We saw administrative measures in July when Rupee dipped to 285/$
Volatility may still occur, but with adequate reserves as an anchor, it becomes reversible rather than destabilising.
How will PKR perform in 2026?
Inflation sets the long-run drift – what the market would like to see
Over any medium horizon, PKR broadly follows the inflation differential. Pakistan’s inflation trend is still meaningfully higher than that of the US. Even assuming gradual disinflation, the gap remains around 5%, translating to roughly around Rs.12-18.
That implies a gradual depreciation over the year, consistent with inflation differentials, rather than a sharp or disorderly adjustment.
In this scenario, the rupee weakens steadily, without triggering stress in reserves or confidence. This is the scenario markets would be more comfortable to witness.
Stability with buffers – Tresmark forecast
This scenario assumes relative political continuity, an intact IMF framework, and a stable geopolitical environment. Fiscal discipline holds, external financing remains available, and bond and multilateral inflows support faster reserve accumulation.
In this environment, Rupee remains range bound in the 280-283 range for the next 6 months with occasional over runs. This is based on the aggressive reserve accumulation (almost 33% higher this year) and the new FX regime in place.
Factors that matter
From here, PKR dynamics into 2026 will be driven less by valuation gaps and more by a small set of structural forces.
• Inflation and interest rate differentials, which define the underlying drift
• Political continuity, which determines whether policy credibility holds
• External financing capacity and fiscal discipline, which shape balance-of-payments risk
• Reserve accumulation behaviour, which limits how far volatility can travel
• Oil prices and regional export competitiveness, which influence the trade balance
• Geopolitical developments and global recession risk, which affect flows and sentiment
These factors do not point to a single number. They determine the path the rupee takes, how volatile it becomes, and whether deviations are absorbed or allowed to compound. For Pakistan, crises have never been about the endpoint alone, but more about how the path was managed.
