Rupee continues to recover in inter-bank

Pakistani currency maintained its upward trend for the fifth consecutive working day as it recouped a further 0.36%, or Rs0.94, and stood at a three-week high at Rs261.88 against the US dollar in the inter-bank market on Monday.

The recovery came on high expectations about the revival of International Monetary Fund’s (IMF) loan porgramme, as the government had met almost all the pre-requisite conditions.

Besides, the fall in Pakistan’s current account deficit to a two-year low at $242 million in January and the increase in foreign exchange reserves by $272 million to $3.1 billion provided support to the rupee against the greenback.

The currency recovered a cumulative 5.6%, or Rs14.7, in the past three weeks compared to the all-time low at Rs276.58 to a dollar hit on February 3, 2023.

As per latest report of the central bank, the country’s real effective exchange rate (REER) – the value of domestic currency in relation to a basket of currencies of trading partners – weakened to a four-month low at 92.8 points in January 2023.

“REER index depreciated to 92.8 in January 2023 as compared to 96.2 in December 2022,” the SBP said on its official Twitter handle.

January’s REER suggests that the rupee still has room for further recovery against the greenback. Experts believe the index should be maintained in the range of 95 to 105.

A REER below 100 makes exports competitive and imports expensive. This suits countries like Pakistan that mostly runs a current account deficit.

On the other hand, the REER above 100 makes imports cheaper and exports uncompetitive.

The central bank has mostly maintained the REER level around 96-97 since entering the IMF loan programme in July 2019.

Experts said that the rupee may recover to Rs240-250/$ following the revival of IMF’s programme and after other multilateral and bilateral creditors unlock new financing of $3-4 billion in the next couple of months.

However, further delay in resuming the IMF programme and acquiring fresh financing will trigger more depreciation of the domestic currency.

Published in The Express Tribune, February 21^st, 2023.

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