Rupee dives to all-time low of Rs168.94

Burgeoning import payments, trade deficit fuel currency decline in inter-bank market


Salman Siddiqui September 15, 2021
PHOTO: FILE

KARACHI:

The Pakistani currency hit an all-time low of Rs168.94 against the US dollar in the inter-bank market on Tuesday in the wake of burgeoning import payments and trade deficit, signalling that demand for the foreign currency remained higher compared to its supplies.

“Apparently, there is no room left for the rupee to maintain the downturn,” Ismail Iqbal Securities Head of Research Fahad Rauf said while talking to The Express Tribune. “If it drops any further, the decline will be unsustainable and short-lived.”

“The rupee may consolidate at around current levels in the short run and trade in the range of Rs165-168 over the next six months (in the medium term).”

The rupee breached the previous all-time low close of Rs168.43 reached on August 26, 2020, according to Pakistan’s central bank data.

With the latest drop of half a percentage point (or Rs0.84) on Tuesday, the rupee has lost 7.23% (or Rs11.4) to date since the start of the current fiscal year on July 1, 2021, when the currency stood at Rs157.54.

The currency has maintained the downturn since touching a 22-month high of Rs152.27 in May 2021, losing a cumulative 10.94% (or Rs16.67) in the past four months.

“The spike of over $1 billion in the country’s trade deficit to $4.2 billion in August is putting pressure on the rupee,” Rauf said.

He elaborated that import payments soared to historic highs of around $6.4 billion in August while the previous peak was recorded in June at $6.3 billion.

On the flip side, export earnings remained sluggish at around $2.2 billion a month in the same months.

The uptrend in international commodity prices suggests that Pakistan’s import bill will remain high in future as well.

Prices of oil and food items are soaring in the world market. In addition to this, businesses are set to import a large number of plant and machinery for setting up new factories and expand the existing production lines under the SBP’s Temporary Economic Refinance Facility (TERF), he said.

The economy relies heavily on the import of raw material for industrial and agricultural goods and the import of petroleum products, edible oil and food items like wheat and sugar to meet the growing demand.

Accordingly, imports were expected to remain high due to the government’s policy of expansion and growth in the economy, he said.

The central bank has projected that the country’s current account deficit would widen to 2-3% of gross domestic product (GDP) during the current fiscal year compared to the decade-low deficit of 0.6% in the preceding year.

Speculations suggested that the authorities concerned had let the rupee depreciate against the dollar ahead of the sixth review of Pakistan’s economy in the current month by the International Monetary Fund (IMF) under the $6 billion loan programme, he said.

The IMF’s review has been on hold since June 2021 when Pakistan failed to enhance electricity tariffs and a few taxes, which the lending institution considered a must to fix the economic issues.

However, the two sides have remained engaged and are expected to find a middle ground to resume the loan programme.

Finance Minister Shaukat Tarin clarified the other day that Pakistan would resume the IMF programme.

Rauf projected that the real effective exchange rate (REER) – Pakistan’s cost of trade with the world – would improve to 95-96 points following the latest drop in rupee’s value, meaning that imports would become expensive and exports would be competitive. REER stood at over 102 points a couple of months ago.

The improvement in REER, which was considered fair while moving around 100 points, suggested that there was no room left for a further drop in the rupee value, he said.

Published in The Express Tribune, September 15th, 2021.

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