Pakistan’s real effective exchange rate (REER) – the rupee value against a basket of currencies of the trading partners – appreciated to a six-year high at 104.1 in March 2024, theoretically making imports cheaper and exports challenging.
However, Pakistan’s imports have stood low in the wake of restrictive measures taken by the government to manage the low foreign exchange reserves while exports have remained stable. According to the State Bank of Pakistan’s (SBP) data, REER rose to 104.1 in March, the highest since 2018. In the previous month, the index had been at 102.1.
A section of financial experts strongly believe the recent wave of rupee appreciation would continue since massive depreciation in the past stemmed from political instability and the smuggling of US dollars to neighbouring countries. They foresaw the rupee regain more ground against the greenback to Rs250/$ in future.
The central bank has found through a study that 18-19 leading currency dealers (commercial banks) had deliberately pushed down the rupee in 2021 and 2022 with the objective of pocketing a windfall profit of Rs110 billion through the exchange business.
To recall, the rupee-dollar parity was around Rs160/$ on December 31, 2020. Later, manipulation by market forces, smuggling of dollars to Afghanistan in the wake of financial crisis at the end of a 20-year US war in the neighbouring country and political upheaval in Pakistan since the beginning of 2022 (including the change of government in April 2022) mounted pressure on the rupee, which plunged to the all-time low at Rs307.10/$ in the first week of September 2023.
Other financial experts, however, were of the view that Pakistan’s low foreign exchange reserves of $8.05 billion, held by the SBP, and high foreign debt repayments would not let the rupee appreciate beyond Rs277/$.
A likely uptick in imports will pile further pressure on the currency and may take it to Rs285/$ by the end of June 2024.
In the past, the Pakistan Muslim League-Nawaz (PML-N) government had strictly controlled the rupee’s movement to avoid its excessive depreciation as REER had been above 120 in 2016. But this time around, the PML-N-led government has chosen a new Finance Minister, Muhammad Aurangzeb, instead of four-time finance minister Ishaq Dar.
Aurangzeb has said that rupee devaluation is not a condition of the IMF, when he along with his economic team is negotiating a new, larger loan programme.
Gold loses ground
Gold on Monday dropped Rs3,500 and settled at Rs248,700 per tola (11.66 grams) in line with the global trend.
During the day, the precious metal fell $30 to $2,381 per ounce (31.10 grams) in the international market, according to the All Pakistan Saraf Gems and Jewellers Association.
Bullion hit an all-time high at Rs252,200 on Saturday after it spiked over $2,400 per ounce in the international market in the previous week.
Earlier, gold surged $400 per ounce in the prior four weeks in the wake of a geopolitical crisis and status quo in the US interest rate, indicating a downturn in the near future.
Published in The Express Tribune, April 23rd, 2024.
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