Ballooning current account deficit likely to keep rupee under pressure

KARACHI: The rupee/dollar parity is likely to face further pressure on ballooning current account deficit next week.

The local currency had already touched an all-time low during the outgoing week. The rupee value may further deteriorate on the mounting demand for external payments.

During the outgoing week, the rupee fell to an all-time low of Rs169.12 against the dollar in the interbank foreign exchange market. Experts believed the State Bank of Pakistan (SBP) intervened in the market to support the rupee. This resulted in the closing of the exchange rate at Rs168.19 against the greenback to end the week on September 17, 2021.

However, the support may not be sufficient in the coming days, as the current account deficit for the first two months widened significantly.

According to the of Balance of Payments data released by the central bank revealed the current account deficit ballooned to $2.29 billion during July–August of the current fiscal year, compared with the current account surplus of $838 million.

The current account deficit widened more sharply in August 2021 to $1.476 billion, against the deficit of $814 million in July 2021 and a surplus of $255 million in August 2020.

The Pakistan Bureau of Statistics (PBS) has revised the data of balance of trade. As per the revised data, the trade deficit for the months July–August 2021 widened to $7.58 billion, or 122 per cent, as against the previous deficit of $7.49 billion, or 120 per cent.

In the initial report of the balance of trade, the import bill was shown at $12.06 billion during the first two months of the current fiscal year but the revised numbers showed it further jumped to $12.168 billion in the months under review.

The rise in the import payments may be attributed to acceleration in the economic activities; following the ease in coronavirus cases. The government has relaxed the restrictions and trade and commercial activities are going back to normal.

The country is in dire need to increase the foreign exchange reserves to feed the external payment.

On the inflows side, the exports increased 28 per cent to $4.587 billion during the first two months of the current fiscal year, compared with $3.584 billion in the corresponding months of the last fiscal year.

Further, the workers remittances also posted a 10 per cent growth to $5.36 billion during July–August 2021, compared with $4.86 billion in the same months of the last year.

However, these inflows are not sufficient to meet the demand for external payments.

The rupee stability will also depend on the security situation in neighbouring Afghanistan. It is reported that the foreign exchange reserves of Afghanistan’s central bank have been blocked after political uncertainty in the country. The payment crisis in Afghanistan is also impacting the currency markets in Pakistan.