Rupee dips to new record low
The sharp drop in the rupee came as the foreign currency inflows from overseas Pakistanis through the RDA dived to a 15-month low at $189 million in May 2022. Photo: file
Pakistan’s currency became highly volatile on Tuesday, as it dropped 1.37% (or Rs2.77) to close at an all-time low at Rs202.83 against the US dollar in the inter-bank market in the wake of mounted pressure of import payments and foreign debt repayments.
The market opened in the morning at Rs200.06 and saw the intra-day low at Rs204.31 before some recovery in the rupee’s value that closed at Rs202.83.
The prolonged delay in the revival of IMF loan programme has continued to mount pressure on the rupee. As soon as the programme is resumed, it will unlock the required foreign financing and stabilise the dwindling foreign exchange reserves.
Responding to a question about the volatility in rupee-dollar parity, State Bank of Pakistan (SBP) Deputy Governor Sima Kamil said at an event “we will return towards stability after the IMF agreement … the agreement is expected after the forthcoming budget (presentation on Friday).”
The rupee-dollar exchange rate was determined by market forces (mostly commercial banks) keeping in view the demand and supply of foreign currency in the country, she added while talking to a group of journalists.
She said that the central bank was working on the issues emerging after foreign banks showed reluctance to finance imports like the import of petroleum crude and refined products.
Tuesday was the third consecutive working day for the rupee’s free fall. The currency has cumulatively lost 2.65% (or Rs5.24) of its value in the three days.
The sharp drop in the rupee came as the foreign currency inflows from overseas Pakistanis through the Roshan Digital Account (RDA) dived to a 15-month low at $189 million in May 2022, according to the latest data released on Tuesday.
The free fall of the rupee weakened the country’s real effective exchange rate (REER) – the value of Pakistani currency against a basket of currencies of global trading partners – to a 15-month low at 95.85 on the REER index in April compared to 96.66 in the prior month.
The undervalued rupee, however, stands positive for Pakistan at a time of financial crisis, as this may help slash the high import bill, grow export earnings and narrow the trade and current account deficits.
Pak-Kuwait Investment Company Head of Research Samiullah Tariq said “(foreign currency) supply constraints have mounted pressure on the rupee.”
Pakistan was due to make notably high oil import payments, as it imported refined petroleum products like petrol at a significantly higher price at around $150 per barrel compared to the crude oil price at $120 per barrel, he said.
Besides, the country required another $4.5 billion to repay the maturing foreign debt during May and June 2022, Arif Habib Limited Head of Research Tahir Abbas said the other day.
Finance Minister Miftah Ismail said that the resumption of IMF programme was a must to arrange foreign financing of $36-37 billion for the next fiscal year starting July 1, 2022 to repay foreign debt and stabilise the foreign exchange reserves.
The reserves have depleted by over $7 billion in the past six months to a criticality low level at $9.72 billion that covers just six weeks of imports. They usually stand at around three months of import cover or higher.
The reserves have dropped due to elevated import payments and foreign debt repayments, while the foreign currency inflows have remained thin against high demand in the domestic economy.
Roshan Digital Account
The foreign currency inflows through the RDA continued to fall for the second consecutive month in May. They stood strong at $290 million in March, which was the last month of Pakistan Tehreek-e-Insaf (PTI) government.
Data compiled by Ismail Iqbal Securities from the State Bank reports suggests that the investment by overseas Pakistanis in the Naya Pakistan savings certificates through the RDA plunged to a 17-month low at $86 million in May.
The investment in the savings certificates hit the peak at $233 million in June 2021.
Former prime minister Imran Khan, in collaboration with the central bank, introduced the RDA for overseas Pakistanis in September 2020 in an effort to stabilise the foreign exchange reserves.
Non-resident Pakistanis have so far deposited $4.36 billion through the RDA in the past 21 months, according to the central bank data.
Real Effective Exchange Rate
The REER index was recorded at 95.85 in April 2022 as compared to 96.66 in March 2022, the SBP reported on its official Twitter handle on Tuesday.
REER that stands slightly below 100 on the index is considered a fair value of the rupee, as it encourages exports and discourages imports. However, any value that stands above 100 makes imports cheaper and exports expensive.
Published in The Express Tribune, June 8th, 2022.
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