The Pakistani currency depreciated against the US dollar by Rs2.99 during interbank trade on Wednesday, carrying forward its downward trajectory from the previous day.
By noon today, the exchange rate stood at around Rs294.50 per USD, according to data collected by the Exchange Companies Association of Pakistan (ECAP).
Meanwhile, in the open market, the greenback was being traded at the rate of Rs303.50.
A day prior (Tuesday) the exchange rate stood at Rs291.51 by day end as per the State Bank of Pakistan's (SBP) daily update.
The downward trend of the rupee follows the dissolution of assemblies on August 9. In recent days, there was speculation among market insiders that the outgoing coalition government had held a controlled exchange rate to save political capital. It was expected that the greenback would rise against the Pakistani rupee once the interim government takes over.
Earlier, the local currency had remained stable at around Rs288 against the greenback during in the past three months.
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Speculations had been rampant that the currency was set to depreciate under the International Monetary Fund's (IMF) latest $3 billion loan program acquired in late June 2023.
Market talk further suggests that the rupee was determined to lose ground in the wake of the government's decision to remove all restrictions on imports which were earlier controlled to manage the country's dwindling foreign exchange reserves.
On Tuesday, the currency slid 1.33% or Rs4 in the open market, to Rs300/$, according to the Exchange Companies Association of Pakistan (ECAP). The difference between exchange rates in the inter-bank and open markets widened to over 2.5%, or Rs8.5, breaching the International Monetary Fund’s (IMF) recommended spread of 1.25% (around Rs4).
Topline Research reported that all the 12 currencies in the MSCI Asia Emerging and Frontier Markets Index lost value in the range of 0.1% to 1% against the US dollar, but Pakistani and Malaysian currencies fell the most at 1% on Tuesday.
Among these currencies, Pakistani currency has faced the largest decline of 26.6% in the past one year and steepest drop of 22.3% in the first eight months of 2023. Reports suggest the US dollar hit over one-month high against peer global currencies on growing worries about the global economic slowdown, particularly China’s growth.
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Secondly, oil prices have been on an upward trend in the global market, resulting in an increase in demand for the US dollar in Pakistan, which heavily relies on imported energy to meet domestic needs.
The widening gap between inter-bank and open markets signals that either the rupee will shed more value in inter-bank trading or it would recover in the retail market, which will narrow the difference to the IMF-recommended level of 1.25%.
In both markets, the demand for the US dollar stood high compared to its supply. The IMF said that the gap should not exceed 1.25% in any of the five consecutive working days.
It also asked Pakistan to let market forces determine the exchange rate considering the demand and supply situation and that there should be no restrictions on imports.
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