- May 23, 2026
- Posted by: Tresmark
- Category:
Tresmark: Turkey’s President Erdogan pushed aggressively for lower interest rates believing cheaper borrowing would help control inflation and support growth, pretty much against Economics 101. He kept interest rates at 8.5% even as inflation surged toward 85%. The Lira eventually lost over 90% of its value against the Dollar, while people rushed toward Gold, Dollars, and even crypto just to protect their savings. What initially looked like short term economic relief slowly turned into a much deeper crisis, with markets increasingly questioning whether short term stability could really coexist with worsening longer term imbalances underneath.
Turkey has effectively spent the last 2–3 years trying to repair the imbalances created during that experiment, with interest rates topping 50% at times.
Pakistan’s recent Rupee strength is now sparking a quieter version of a similar debate. While a stronger PKR helps inflation sentiment and improves near term confidence, some market participants are questioning whether excessive currency strength may actually be counterproductive.
Forward Looking BoP
While it is true that surplus Dollar liquidity currently exists in the market, with the Central Bank actively mopping it up to build reserves, part of the recent support also appears linked to Eid related remittance seasonality and compressed imports due to weaker domestic demand. The forward looking balance of payments picture therefore may not appear as comfortable. For import dependent economies, oil shocks have historically acted as the fastest trigger for turning seemingly stable balance of payments positions back into stress events.
What’s not working
Currently, we know that the current account has already slipped back into a deficit of $324mn, REER has appreciated to 105, while SCRA has also witnessed a net outflow this month.
Recent diplomatic signals suggest that some form of reconciliation between the US and Iran may be announced in the coming days. However, if the conflict prolongs, Pakistan’s external account could come under sustained pressure.
– Remittances: may soften. Around 55% of Pakistan’s remittances originate from the GCC region and during Covid related disruptions, inflows had temporarily declined by nearly 20% globally. This would translate in to roughly 10% slowdown, that alone could reduce inflows by almost $300mn per month.
– Exports: softer global demand may pressure exports again, potentially reducing inflows by another $250mn per month.
– Fuel: elevated oil prices could further increase Pakistan’s import bill by roughly $200-300mn per month, assuming austerity measures are implemented in letter and spirit.
– Economics 101: Currencies typically depreciate broadly in line with inflation differentials over time. Based on current inflation differentials, that would roughly imply a PKR depreciation of around 7% today rather than appreciation.
Overall, these pressures could easily push Pakistan’s external account back toward a monthly deficit range of $500-800mn. At that point, monetary tightening alone may not be sufficient to offset broader balance of payments pressures.
What does this mean?
The current trajectory may eventually require a very mild and orderly depreciation in the Rupee, perhaps to the extent of 50-100 paisa, rather than allowing imbalances to build underneath. A gradual adjustment today may prove far healthier for long term sustainability and investor confidence than a delayed or sharper correction later on.
Forward Bookings
Forward premiums in the 1-3 month tenors continue to trend higher and are currently hovering around 205, 370 and 530 paisa respectively, with larger volume clients even managing to secure better levels. In our view, exporters should continue booking forwards, but preferably within the 0-2 month tenor range and certainly avoid going beyond 3 months at this stage.
IMF Engagement
Pakistan and the IMF agreed to maintain a tight monetary and fiscal stance ahead of the FY27 budget, with authorities committing to preserve the 2% primary surplus target despite rising external risks. The discussions highlighted concerns around higher global oil prices and Middle East tensions, which could pressure inflation, the current account, and FX reserves.
