Pakistani currency hit a new all-time low of Rs169.60 against the US dollar in the inter-bank market on Monday in the wake of mounting pressure of import payments on the back of a surge in commodity prices in global markets and the tumultuous geopolitical situation in Afghanistan.
Scheduled talks between the International Monetary Fund (IMF) and Pakistan to resume $6 billion loan programme are not seen as a strong reason behind the downward trend in the rupee, but the expected successful conclusion of the discussion is projected to end volatility in the currency.
Since the rupee has achieved equilibrium against the US dollar a few days ago, the recent drop in its value is unsustainable and short-lived.
“Panic buying of dollar has caused the rupee’s slide,” Ismail Iqbal Securities Head of Research Fahad Rauf said while talking to The Express Tribune.
“The rupee volatility will end with successful conclusion of talks between Pakistan and the IMF in October,” said Arif Habib Limited Head of Research Tahir Abbas.
The fresh decline of the rupee came on the day the benchmark Brent crude price hit a three-year high of nearly $80 per barrel in the international market.
With a fresh drop of Rs0.52 (or 0.31%) on Monday, the rupee has depreciated 7.65% (or Rs12.06) since the start of the current fiscal year on July 1, 2021, revealed data of the State Bank of Pakistan.
The rupee has maintained its downward trend since hitting 22-month high of Rs152.27 against the greenback in May 2021. Since then, the currency has lost 11.38% (or Rs17.33). Market speculation suggests that exporters have stopped selling dollars in the inter-bank market on rumours that the rupee will fall to around Rs200. “We see rupee trading in the range of Rs165-170 over the next six months,” Rauf said.
The rapidly transforming geopolitical situation in the region, following the end of US war in Afghanistan and the return of Taliban, is also impacting the rupee. “Any change in the political setup in Kabul directly or indirectly impacts Islamabad and its economy,” Abbas said.
A leading businessman added that Afghanistan was a huge source of dollar inflows into Pakistan when the US and NATO forces were present in the neighbouring country because they spent millions of dollars per month.
“This supply has vanished following the return of US and NATO forces back to their homelands at the end of the war,” he said.
Abbas and Rauf said that the forthcoming talks between Pakistan and the IMF were no solid reason for the rupee depreciation.
The rupee-dollar parity is not part of the talks because the central bank has opted for a flexible exchange rate to let market forces decide per dollar value of the rupee keeping in view the demand and supply of the foreign currency.
“Pakistan has clearly stated that it will resume the IMF programme,” Abbas said, adding that a successful resumption of the IMF loan programme would stabilise the rupee value at around current levels.
It will not only support the release of $1 billion in IMF loan tranche but will also open new avenues of global financing for the country.
“In case, the two sides fail to find a middle ground and talks end on an unsuccessful note, the rupee may cross several limits on the downside,” he added.
He said that the government and the central bank were jointly taking corrective measures to ensure growth of the economy. Imposition of regulatory duties on imports, 100% submission of import payment at the time of opening of letters of credit and restrictions on luxury car financing will address imbalances in the economy and support growth.
Rauf said that the real effective exchange rate (REER) - Pakistan’s cost of trade with the world - had improved to 97 points from over 102 points a couple of months ago. “This suggests the rupee will consolidate around current levels.”
Published in The Express Tribune, September 28th, 2021.
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