The Pakistani rupee faced a sharp decline against the US dollar on Wednesday, succumbing to mounting import pressures, according to financial analysts. The local currency dipped by Rs3.26, marking a significant 1.16% drop against the dollar in the interbank market. The closing rate, as reported by the State Bank of Pakistan (SBP), settled at 280.29, a stark contrast to the previous day’s rate of 277.03, marking the second consecutive day of depreciation.
This sudden depreciation followed the end of the rupee’s 28-day winning streak, which experts attributed to a market correction and the inevitable consequences of a 10% appreciation in the currency’s value.
From September 5th to September 17th, the rupee had impressively gained 10.9% or Rs30.3 against the US dollar over the course of 28 consecutive sessions. Dr. Khaqan Hassan Najeeb, a former adviser to the Ministry of Finance, emphasized that in a market-based exchange rate regime like Pakistan’s, currency values fluctuate based on the principles of supply and demand.
Najeeb highlighted several factors contributing to the recent strength of the rupee, including administrative actions to curb illicit markets, decreased demand for dollars, exporters capitalizing on their receipts, and a modest increase in remittances. These factors had been instrumental in bolstering the rupee’s value.
However, despite these improvements, the need for imports, debt payments on foreign loans and bonds, and the potential for reduced inflows in the interbank market collectively led to the rupee’s decline by Rs3.26.
It’s worth noting that the JP Morgan Real Effective Exchange Rate index for Pakistan reached a one-year high at 103, underlining the currency’s strength.
To ensure continued stability in the external sector, experts recommended that Pakistan secure funding from donors and financial institutions. With gross financing needs estimated at nearly $24 billion for FY23, Pakistan must maintain flows from bilateral and multilateral partners, commercial inflows, rollovers, and funds committed at the Geneva International Conference for floods.
Sana Tawfik, Deputy Head of Research at Arif Habib Limited, pointed out that the rupee’s winning streak had been underpinned by government efforts to crack down on illicit activities and implement structural reforms in exchange companies. Moreover, hoarders and exporters selling dollars had also contributed to its strengthening.
However, Tawfik noted a shift in the recent trend as importers became more active, making several import payments. This surge in import-related transactions exerted pressure on the rupee.
Constrained by International Monetary Fund (IMF) conditions, Pakistan faces challenges in curbing its imports, placing added pressure on the currency. Tawfik anticipated that as imports rise due to reduced restrictions and increased demand, the rupee’s value is likely to continue its descent.
Tawfik stressed the importance of maintaining discipline in the rupee’s movements, emphasizing that the authorities are actively managing the spread between the formal and informal markets, preventing any significant disparity.
She expected the rupee to remain within a range, in accordance with the IMF’s guidelines. Any appreciation, she suggested, would be gradual and contingent on improved inflows.
Looking ahead, Tawfik predicted that the rupee might settle between 290-300 by December, offering cautious optimism amidst evolving market dynamics.
