Rupee dives even lower as economic winter sets in

The rupee kept sliding by leaps and bounds on second consecutive day on Tuesday, plunging by a record 3% or Rs6.79 on day-to-day basis against the greenback, reaching a new all-time low of Rs221.99 to a dollar in the inter-bank market.

The free fall of the Pakistani currency accelerated after Fitch Ratings downgraded the country’s credit rating outlook to negative from stable before domestic financial markets opened in the morning, BMA Capital Deputy Head of Research Abdul Rehman told The Express Tribune.

The global credit rating agency revised down its outlook on Pakistan even though it strongly expected revival of the International Monetary Fund (IMF) loan programme for Islamabad soon. It, however, still found Pakistan short of foreign funding against its high requirement amid rise in political temperatures and economic meltdown in the country.

The State Bank of Pakistan (SBP) said that fluctuation in the rupee value was a built-in feature of the market-based exchange rate mechanism. The gaps in foreign financing and re-emergence of political noise made the rupee volatile.

Besides, strengthening of the US dollar against other global currencies also caused a fresh decrease in rupee value in recent months. Cumulatively, rupee has slumped 5.23%, or Rs11.04, in the past two days, according to the SBP data.

The revision of the outlook to negative reflects a significant deterioration seen in Pakistan’s external liquidity position and financing conditions since early 2022.

“We assume IMF board approval of Pakistan’s new staff-level agreement, but see considerable risks to its implementation and to continued access to financing after the programme’s expiry in June 2023 in a tough economic and political climate,” Fitch Ratings said.

“Renewed political volatility cannot be excluded and could undermine the authorities’ fiscal and external adjustment, as happened in early 2022 and 2018, particularly in the current environment of slowing growth and high inflation.”

Read more Economic outlook could turn worse: IMF

Pakistan’s central bank said on its official Twitter handle: “The recent movement in the rupee is a feature of the market-determined exchange rate system. Under this system, the current account position, relevant news items, and domestic uncertainty together determine daily currency fluctuations.”

Recent rupee depreciation against the US dollar is also a part a global phenomenon. “Globally, the US dollar has surged by 12% in the last six months to a 20-year high, as the Fed has aggressively raised interest rates in response to rising inflation,” the SBP said.

Like most advanced and emerging market currencies across the world, the rupee has been depreciating against the US dollar since December 2021. “It has depreciated by 18% over this period.” In real effective terms — ie against a basket of currencies in which Pakistan trades and adjusting for inflation — depreciation in the rupee since December 2021 has only been 3%. “This is a better measure of the strength & competitiveness of a currency than the US$ rate,” the central bank said.

Rehman of the BMA Capital said that Pakistan’s economy was already under the axe. The re-emergence of political noise after the Pakistan Tehreek-e-Insaf (PTI) won the Punjab’s by-polls with a big margin has further added pressure on the economy, as the poll results have upset PML-N government at the Centre.

The situation led rupee to maintain the downturn. “It is so difficult to determine where the fall of rupee would bottom out,” Rehman said, adding: “The non-stop devaluation of the rupee has made it undervalued. The extended drop in the currency is not based on economic fundamentals, but the return of volatility – largely based on sentiment at present,” he said.

The economic fundamentals suggest the fair value of rupee near and around Rs195-200 at present, he said. He added that the political and economic uncertainties had panicked “importers to buy dollars today rather than tomorrow and that’s too in as much big quantity as they can do” to avoid paying a higher price in coming days.

In the previous fiscal year, the rupee cumulatively lost 30% to around Rs205 against greenback on June 30, 2022. It is expected to continue moving downwards till foreign currency inflows begin to make their ways into the country.

In line with the rupee fall, the Pakistan Stock Exchange (PSX) also witnessed intense selling pressure on Tuesday, with the benchmark KSE-100 index losing over 900 points. The KSE-100 Index opened at 41,367.11 points and went up 176 points initially. But closed at 40,389.07 points, down 978.04 points.