Why Pakistani rupee bleeds

Shahnawaz Akhter Web Editor

20th Sep, 2021. 06:19 pm
Shaukat Tarin

Despite tall claims of a burgeoning economy by the Pakistan government, the rupee plunged to depth raising concerns that the free-fall may continue in the future too.

The external payments pressure and the uncertain conditions in the neighbouring Afghanistan will keep a check on the rupee stability, while the incessant fluctuations in its value against the dollar is expected to continue during the remaining part of the current fiscal year.

The rupee on Monday again depreciated 53 paisas against the dollar, as external payments kept the demand higher for the foreign currency.

The exchange rate ended at Rs168.72 against the dollar from last Friday’s closing of Rs168.19 in the interbank foreign exchange market.

However, experts believed that the State Bank of Pakistan last week intervened in the market and pumped dollars to support the local currency, owing to which the rupee gained some grounds during the last two days of the week to close at 168.19 on September 17, 2021 after hitting the record low of 169.12 on September 15, 2021.

Earlier, the rupee recorded the all-time low of Rs168.44 against the dollar on August 26, 2020.

The local currency lost around 18 paisas against the dollar from the previous day’s closing of Rs168.94 in the interbank foreign exchange market. It has lost around Rs11.4 against the greenback during this fiscal year when the exchange rate closed at Rs157.54 on June 30, 2021.

According to currency experts, one can witness an increase in the domestic debt and inflation due to the rupee devaluation, resulting in a decline in the manufacturing of goods for import purposes.

An analyst said: “The rupee is heading towards making a new historic low against the dollar after it made the historic low of Rs168.44 on August 26, 2020.”

The main reason for the depreciation can be attributed to the ballooning trade deficit during the last couple of months, which threatened further decline in the rupee value in the days to come.

The trade deficit for the period July-August of the current fiscal year widened 120 per cent to $7.5 billion, compared with the deficit of $3.4 billion during the same period of the last fiscal year.

The import bill is rising sharply during the current fiscal year. The import bill climbed 72.6 per cent to $12.06 billion during the first two months of the current fiscal year, compared with $6.99 billion in the corresponding months of the last fiscal year.

However, export receipts failed to grow to match the import bill. The exports grew 27.59 per cent to $4.57 billion during the first two months of the current fiscal year, compared with $3.58 billion in the same period of the last fiscal year.

The level of external payments pressure on the local currency can be gauged by the fact that the recent inflows through export, workers remittances, Roshan Digital Accounts and the International Monetary Fund (IMF) assistance failed to support the local unit.

Pakistan received $2.75 billion from the International Monetary Fund (IMF) under an assistance package to fight the coronavirus pandemic. Similarly, the inflows of workers remittances maintained the trend, reaching $2.66 billion in August 2021.

“This is the sixth consecutive month when the inflows recorded around $2.7 billion on an average, and the 15th consecutive month to remain over $2 billion,” according to the State Bank of Pakistan.

Likewise, the overseas Pakistanis deposit around $2.114 billion by the end of August 2021 in their Roshan Digital Accounts (RDA), which are maintained at the domestic commercial banks.

Despite all these inflows, the rupee witnessed massive decline since the start of the current fiscal year. The local currency lost around 10.48 against the dollar during the current fiscal year, compared with the closing of Rs157.54 on June 30, 2020.

Political uncertainty in Afghanistan after the Taliban takeover has also escalated the demand for the foreign currency in Pakistan. The US has blocked the funds of the Afghan government, which created a payment crisis for the country.

It is feared that the smuggling of commodities and other essential items from Pakistan to Afghanistan will not only increase the prices but also further increase the import bill of the country.

Pakistan’s economy grew significantly in the fiscal year 2020/21 owing to the rebound in the domestic demand and healthier exports growth, while it is expected to remain subdued in the first quarter of 2021/22, as the ease in the lockdown restrictions late June resulted in an increase in the new Covid-19 cases.

Consequently, some key economic regions implemented partial lockdowns in July and August, which weighed on the economic activity. Moreover, the workers’ remittances declined in July, although this was partially due to the Eid-ul-Azha holidays, which led to fewer working days relative to the same period last year.

Further, exports growth eased significantly in July, likely due to supply chain disruptions, amid renewed Covid-19 restrictions across the region.

That being said, the fiscal support measures outlined in this fiscal year’s budget should be stoking domestic demand.

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