The local currency broke its three-day long downward streak, appreciating by 0.72% (or Rs1.58) to close at Rs220.89 against the US dollar in interbank market on Monday.
The currency has partially regained lost ground following Finance Minister Ishaq Dar’s warning of action against hoarders of the foreign currency and manipulators responsible for undervaluing the rupee. Dar estimated the fair value of the domestic currency to be in the range of Rs180-200 against the greenback over the weekend.
More surprisingly, the real effective exchange rate (REER) depreciated to 90.9 in September 2022, as compared to 94.4 in the prior month of August 2022. This suggests there is space available for further appreciation of the local currency.
In October, the rupee also won the title of the best performing currency in Asia, a local brokerage house reported, quoting Bloomberg data.
All these positive developments have taken place at a time when the country’s foreign exchange reserves have been on the decline since the past 10-months (excluding the Asian Development Bank’s (ADB) inflows at $1.5 billion). Crucially, export earnings are sliding downwards, the open-market is facing acute shortage of US dollars and illegal hawala-hundi operators are allegedly smuggling foreign currency out of the country.
In addition, imports are controlled through administrative measures, global commodity prices have remained on the higher side, domestic industrial units are reporting complete or partial closure, floods have partially damaged the agronomy and the overall economic growth is revised down to 2% in the current fiscal year of 2023, as compared to 3-4% for the year preceding the floods.
It seems that Dar has resumed his old practice of controlling the rupee-dollar exchange rate which has made imports cheaper and has put export earnings at risk of slippage. The situation, however, may lead to widening both the fiscal and current account deficits in the future.
In the past three consecutive working days, the rupee had cumulatively decreased by 1.25% (or Rs2.47) to Rs222.47 on Friday, as compared to Rs219.73 on Tuesday.
Keeping in view the relevant developments, Pak-Kuwait Investment Company (PKIC) Head of Research, Samiullah Tariq said that “The rupee would maintain a range of Rs215-220 against the US dollar in the short-run”.
“The forthcoming numbers regarding the country’s import, export and remittances for the month of October 2022 will give a new direction to the rupee-dollar exchange rate for the near future,” he added.
“If export earnings are on the decrease, then import payments have also remained on the lower side, creating a balance in the trade deficit,” Tariq said.
“As far as the REER appreciating – the value of the rupee against a basket of currencies of Pakistan’s trading partners – it should be hovering around 94 at the current value of rupee at Rs220.89 against the greenback,” he further noted.
“The central bank has mostly maintained the REER at 96-97 in the last couple of years till Dar returned as minister of finance in September, 2022 after a five-year gap. Earlier, he had maintained the REER at over 120, five years ago,” Tariq explained.
In a brief comment, Alpha Beta Core (ABC) CEO, Khurram Schehzad said, “As per the REER index, the rupee may gain further strength,”
The range of 96-97 is assumed at being at a fair level for the REER. A REER above 100 becomes risky, as it makes imports cheaper and exports expensive in developing economies like Pakistan.
Topline Securities CEO, Muhammad Sohail said on social media that “in the outgoing month of October 2022, the rupee gained 3.3% against the US dollar. Similarly, the rupee was amongst the top performing currencies in Asia during the month (October 2022), as per Bloomberg”.
Published in The Express Tribune, November 1st, 2022.
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