Tentative rupee recovery

Pakistani rupee has been subjected to tremendous battering since some time and fell down the pegging order colossally. The consistent depreciation of rupee badly unbalanced the monetary situation in Pakistan opening up gates of inflation bringing untold economic miseries to the people. Despite the unprecedented devaluation of rupee banks continued to brave foreign exchange liquidity crunch amidst rising demand for dollars. As a last resort the banks started rationing foreign exchange to meet the most crucial demand originating from the most important among all clients. The situation is simply untenable and may not be sustained for long as all economic indicators point out to the bad economic future that may further put pressure on the already besieged populace of the country.

The foreign exchange reserves of Pakistan have simply melted away as the State Bank of Pakistan had only about $8.238 billion worth of them that are barely able to cover just five weeks of import bills of goods. It is very well-known that when the reserves are not enough to cover import bills for three months, they are considered inadequate sending negative signal to the world with the result that panic sets in making it very difficult for the State Bank of Pakistan to defend rupee. Once rupee loses this crucial support then it starts shedding its value and that is precisely what has happened currently. Divested of official support the Pakistani rupee is now prone to a free-fall with its value steadily dwindling. The current scenario has witnessed that there is hardly any chance for the rupee to recover enough for gaining the value against dollar that it held just last year.

Quite intriguingly, just back in August 2021, the foreign exchange reserves were at their highest level of $20.074 billion that were considered sufficient enough to cover a little more than three months of goods’ imports. In September 2021, the reserves at $19.253 billion still provided three months of import coverage but from October 2021, the reserves began falling, both in value as well as in terms of import cover. The rupee came under pressure and lost 7.6 per cent value against the US dollar in the next five months and 10 days — between 1 November 2021 and 10 April 2022. The rupee began sliding too fast after the change of regime in Islamabad and in less than three months (between 11 April and 24 June) it lost more than 12.3 per cent value, coming down to Rs.207.48 a US dollar on 24 June from Rs.184.68 a dollar on 10 April, 2022.

The current situation is highly risky compelling economic experts to analyse the fundamental reasons for the rupee’s weakening and they point out that widening trade and current account deficits, growing external debt servicing, low growth in total exports, stagnating foreign investment and signs of weaker growth in remittances were present even in the PTI regime. The additional factor was the change of government breeding intense political uncertainty that further caused the rupee to fall. The fact that IMF stalled programme is taking long time to materialise has also contributed to the decline of rupee. The situation became so testy that at one point rupee touched an all-time low of 211.93 before making a considerable gain the very next day on news that Pakistan would get a $2.3 billion loan from a consortium of Chinese banks within days, a development underscoring the heavy reliability of rupee on external financing factors.

Despite periodic injection of foreign capital in the country such as a $1 billion loan granted by South Korea the huge overall financial liability is keeping the rupee fairly depressed. The situation has compelled the State Bank of Pakistan to maintain market-driven exchange rates and even when its reserves grow large enough to embolden it to intervene in the foreign exchange market it would do so to smooth out extreme volatility and not to keep the rupee artificially strong. In this context, all the central bank can be expected to do is intervene in the market through short-term dollar-rupee swaps. This means it will buy back the dollars sold into the market within a specified period extending from a few days to a few weeks, as the situation may demand. The matter of fact however is that the State Bank of Pakistan would not like to remain a net seller of dollars into the market at the end of a quarter as certainly the IMF would not let this happen.

The stability of rupee hinges crucially on the revival of agreement with the IMF alongwith adequate financial assistance provided by friendly countries such as Saudi Arabia, the UAE and, possibly, Qatar. By all accounts the IMF agreement may soon see light of the day as Pakistan has complied with most of the conditions it raised before finalising the deal. Several international financial institutions including the World Bank and Asian Development Bank are waiting for the conclusion of the Pakistan-IMF deal to start project lending into the country. Friendly nations like China and Saudi Arabia have also reportedly communicated to the government that post-IMF deal they would place more state funds into SBP’s coffers or announce rolling over of already deposited funds. Such developments are expected to go a long way in stabilising the rupee though for the moment the currency is evenly poised to regain much of its past value. TW