Rupee slumps to fresh 10-month low of 164

Rising demand for foreign currency in domestic economy drives decline

KARACHI:

Pakistani currency hit a fresh 10-month low of Rs164 against the US dollar in the inter-bank market on Thursday owing to rising demand for the foreign currency in the domestic economy to pay for surging imports and repay the foreign debt.

Arif Habib Limited (AHL) Head of Research Tahir Abbas, however, ruled out further depreciation in rupee under the current cycle of downturn and expected the local currency to either hover around the current level or enter recovery mode in the short-run.

“Rupee may consolidate at around the current level of 164 (to the greenback) or appreciate to Rs160-161,” he said. “The scheduled arrival of $2.8 billion from the International Monetary Fund (IMF) on August 23 would build the country’s foreign currency reserves and aid appreciation of rupee,” he said.

The announcement of incentives by the government for achieving sustainable growth in IT and telecom exports coupled with continuous receipt of strong remittances from overseas Pakistanis should support the rupee’s recovery from the current 10-month low value, he said. The consolidation phase or recovery would last for a brief period, as he saw “the rupee losing to around Rs166 against the US dollar by end of December 2021”.

With a fresh decline of Rs0.09 on Thursday, the rupee has depreciated by slightly over 4% in the current fiscal year (since July 1) to date and 7.7% since it hit 22-month high of Rs152.27 in May 2021, according to the central bank’s data.

“The significant increase in import payments in June created (additional) demand for dollars, which weakened the rupee,” Abbas said.

He said the new wave of downtrend in rupee began in mid of July when the central bank reported record high import payment of $6.3 billion during the month of June, the last month of the previous fiscal year 2020-21. The exorbitant import payments turned the balance of current account into deficit of $1.8 billion in the previous fiscal year (FY21) compared to a surplus throughout the first 11 months of the same year.

The month of June usually witnesses comparatively higher international payments on account of usually higher imports and scheduled payments by the government and the private sector.

He said that import payments cooled down during the month of July while the inflow of workers’ remittances remained high at $2.71 billion in the first month of the ongoing fiscal year 2021-22.

The remittances remained strong in July despite lesser working days in Pakistan and Gulf countries on account of Eidul Azha holidays. It is pertinent to mention that majority of non-resident Pakistanis live in gulf counties. He hoped that remittances would remain strong going forward and build foreign exchange reserves which would strengthen rupee in the short-run.

The local currency, however, may see a historical average depreciation of around 4% in FY22 due to higher inflation reading in the domestic and global economy.

Published in The Express Tribune, August 13^th, 2021.

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