The rupee woes

A stronger dollar is battering the Pakistani currency on a daily basis, contributing to the skyrocketing prices of all the essential and non-essential commodities and services.

This is compounding Pakistan’s financial distress at a time when its foreign exchange reserves have plummeted to cover only less than one month of import bill. The official foreign exchange reserves held by the State Bank of Pakistan have plunged to $6.72 billion by the week ended December 02, 2022.

Under more routine circumstances, many countries benefit from falling currencies because it makes their products cheaper and more competitive for exports. But at the moment, any possible gain from higher exports is being offset by low domestic economic activity.

When the PML-N veteran Ishaq Dar — known for favoring a stronger currency by hook or by crook — took over as finance minister, analysts predicted that he would focus on improving foreign reserves, reducing inflation and stabilizing the rupee. But within the opening few months of his innings, whatever little reputation Ishaq Dar had for being an efficient finance minister, was tarnished.

The fact remains that the rupee is under stress even though soon after Ishaq Dar took oath as the finance minister in end-August, the local currency rebounded to 217 and below to a dollar from 240. But as predicted by currency experts, these gains were short-term as the country’s economic fundamentals did not back a strong rupee.

The one-trick pony could only and forcibly hold the dollar in the inter-bank market, but not in the open market. And that too just on paper as dollars remain scant both in the interbank and the official open market.

However, this resulted in a thriving black market, where dollars and any other foreign currency remain available at a much higher rate. Now there are at least three different dollar rates which are crippling imports and boosting smuggling and grey markets across Pakistan.

The spread between the inter-bank and open market foreign exchange rates has widened to Rs20 per dollar approximately, with experts attributing the gap to demand-and-supply dynamics.

The artificial appreciation in the currency’s value has also diverted remittance inflow from formal banking channels to informal and illegal channels (hawala-hundi). Accordingly, remittances sent home by overseas Pakistanis hit an eight-month low of below $2.5 billion in the month of October 2022.

The reserves with the central bank at this point of time do not inspire much confidence either as they are hardly sufficient to cover import requirements of the country for just over one month as compared to the norm of at least three months.

The widening differential between the rupee in the interbank market, the open market and the rate on offer by resurgent hundi/hawala system that accounts for a steady decline in the remittance inflows placed an ever-rising pressure on the country’s foreign exchange reserves and consequently on the rupee-dollar parity.

Besides, controlling the currency value is also contrary to the IMF’s recommendations of a fair market value of the rupee. Significant future bilateral and multilateral inflows to Pakistan are subject to the IMF’s nod regarding Pakistan’s economy.

Receiving the IMF’s green signal is now more crucial than ever for Pakistan amidst lower prospects of smoothly funding the country’s external financing gap with almost four-year low forex reserves with the central bank.

Meanwhile, the government is confident about receiving $3.0 billion in the coming days that would boost the central bank’s reserves. Out of these, $1.7 billion are expected under project investments and the remaining from the World Bank and the ADB.

Also, from the $22 billion debt obligations scheduled for FY23, the government claims to have successfully rolled over almost $7.0 billion including $3.0 billion owed to Saudi Arabia.

Efforts are also underway to shrink this year’s current account deficit that was initially estimated at $12 billion for FY23. However, the delay in the export receipts and expanding gap between interbank and curb market rates, would keep currency markets volatile.

Now that even the central bank has run short of greenbacks to manipulate the market, political stability can be the only impetus to stop the rot. And, the announcement of early general elections is likely to prove the first step towards political stability.