Will rupee bloodbath continue?

The rupee is heading towards an undesirable level of 200 against the dollar, as the economic managers have failed to create any deterrence to stop its free fall.

Considering the pace of the continuous rupee depreciation, it can be assumed that the 200 mark is not far away. The dollar has already breached Rs190 level during the intraday trading in the interbank foreign exchange market on April 7, 2022.

Topline Securities CEO Muhammad Sohail said that there are several reasons for the consistent fall in the value of the rupee, including political uncertainty, depleting foreign exchange reserves, large import bill and widening of the current account deficit.

“The exchange rate is near Rs200 against the dollar, as scheduled large external payments are making things worse.”

A research carried out by Topline Securities in December 2021 predicted that the exchange rate may touch Rs190 by June 30, 2022.

“The prediction was made according to the economic conditions of that time. But now the scenario has significantly changed, especially after massive depletion in the foreign exchange reserves,” Sohail said.

The foreign exchange reserves of the country declined by almost 36 per cent during the last seven months. The country’s foreign exchange reserves hit an all-time high of $27.23 billion on August 27, 2021 and fell to $17.47 billion by the week ended April 1, 2022.

Sources in the banking sector said the depletion in the foreign exchange reserves was massive, following the no-confidence motion was moved in early March 2022.

The lending agencies stopped foreign inflows under various heads due to the political uncertainty and Prime Minister Imran Khan’s allegations against the US that it had been working for the regime change in Pakistan.

The rupee fell nonstop against the dollar for the last 17 trading sessions. The exchange rate was at Rs178.51 to the dollar at the interbank closing on March 11, 2022 and since then the local unit fell Rs9.67, or 5.42 per cent, compared with the closing of Rs188.18 on April 7, 2022. Overall the rupee plunged 19.45 per cent during the current fiscal year.

The rupee depreciation is in line with the depletion of the foreign exchange reserves. The reserves are falling for the last eight consecutive weeks and recorded a decline of $6.24 billion till April 1, 2022, since February 4, 2022, when the reserves stood at $23.721 billion.

During the latest spree, when the dollar made huge jumps to make new highs for 17 consecutive trading sessions, the State Bank of Pakistan (SBP) remained silent. The business community severely criticised the central bank for not taking any effort to stop the rupee depreciation.

Korangi Association of Trade and Industry (Kati) President Salman Aslam expressed fears of a huge setback to the industry due to inflated prices of basic raw materials and utilities.

“The dollar is hitting new highs every day. It is detrimental to the economy. The countries whose currencies had depreciated so fast in the world were on the verge of collapse and those governments have failed to rebuild their economies,” he said, adding that in such a case, it becomes the responsibility of the central bank to intervene realising the gravity of the matter and stopping the diminishing value of the rupee.

The value of the dollar has been continuously rising, which has made the Pakistani rupee one of the worst currencies in the region, while raising fears of a severe surge in inflation, Aslam said.

The Lahore Chamber of Commerce and Industry (LCCI) also made a similar appeal to SBP Governor Dr Reza Baqir.

The LCCI President Mian Nauman Kabir said that the exchange rate is on the rise and the central bank should intervene to avoid an economic crisis. “The rupee depreciation would be the last straw that breaks the camel’s back,” he said in a statement.

“The dollar rate against the rupee was Rs4.76 in the 60s, Rs59.30 in 2005 and it touched the highest level during the current financial year. Soaring dollar price led to trade deficit, import costs, hike in POL prices, etc,” Kabir added.

Some analysts believe that it was beyond the control of the central bank to manage the exchange rate due to the recently developed situation. Pakistan is facing a serious balance of payments crisis due to expansion of the economy after the ease of coronavirus. It becomes more challenging after the withdrawal of the US forces from Afghanistan.

The US freezes the foreign currency accounts of the Afghan government, which resulted in huge outflows of the foreign exchange as well as local currency from Pakistan to the neighbouring country.

These developments directly affected the import bill of Pakistan, which surged 49 per cent to $58.69 billion during July-March 2021/22, compared with $39.49 billion in the corresponding period of the last fiscal year. This resulted in a huge gap of 70 per cent in the trade deficit.

The trade deficit of the country swelled to $35.39 billion during the first nine months of the current fiscal year, compared with the deficit of $20.8 billion in the corresponding months of the last fiscal year.

The higher foreign outflows caused payment imbalances. The current account deficit ballooned to $12.1 billion during July-February 2021/22, compared with a surplus of $994 million in the same period of the last fiscal year.

Khurram Schehzad, CEO, Alpha Beta Core, a financial advisory firm, said that the State Bank might be intervening in the market but it was unable to manage because of huge external payments.

“Our external payments are too high. Imagine what will happen when a country with limited foreign exchange reserves is paying around $3 billion in a week?”

The political situation has made things more adverse. The foreign lending agencies are now watching the situation very carefully.

“The IMF has also announced that it is not suspending the loan programme. But it will negotiate the next tranche with the new government,” Schehzad added.

This statement was made by the IMF after President Arif Alvi dissolved the National Assembly. The Supreme Court on April 7, 2022 in a landmark decision restored the assembly by revoking the ruling of the deputy speaker and all actions made thereafter.

“In the changing scenario, the IMF will decide accordingly,” Schehzad said.

The restoration of the IMF programme will lead to continuation of other loan programmes with the lending agencies.

For Schehzad, to stabilise the currency and ease down the economic uncertainty, the government should ensure foreign inflows in the shape of remittances and exports.