The rupee fall

The rupee sank to its lowest exchange rate against the dollar since last October, closing at Rs164 yesterday. Analysts say surging current account deficits and rising oil prices are the key contributors, although currency speculators are not helping the situation. The current account deficit alone widened to $1.6 billion in June compared to $650 million in May. More optimistic voices are ‘crediting’ a rise in imports fueled by a strong economic recovery, and external factors such as a generally stronger dollar. Such analysts have also noted that oil prices are expected to fall in the near future, which will help improve the current account situation and should stabilise the exchange rate. Meanwhile, remittances are expected to improve, and if Pakistan comes into full compliance with the conditions set by the FATF, more money should also begin flowing into the country.

However, these analysts seem to be betting heavily on the world getting past Covid-19, which does not appear to be the case. The delta variant continues ravaging the world, and even though economic activity has not been affected as severely in many countries where vaccination rates are high, the linked recovery models of a few months back have all become useless as restrictions including partial or full lockdowns are reimposed.

Meanwhile, the SBP’s own ‘rosy’ picture belies the situation. While Pakistan’s external position may well be “at its strongest in many years”, with the deficit representing only 0.6% of GDP, exports and remittances were not keeping pace with the increase in imports, nor have they done so for several months. There is also the example of the ‘seasonal’ imports being blamed for the spike in the deficit. These were end-of-year payments, rather than unexpected import demand. Economic managers should plan around these ‘seasonal’ variations ahead of time to keep currency prices stable.

While Pakistan does have some wiggle room thanks to almost $25 billion in reserves, the structural problems that cause regular exchange rate crashes need to be addressed.

Published in The Express Tribune, August 4^th, 2021.

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