Pakistani rupee dropped to a record low at Rs169.60 against the US dollar on Monday in the inter-bank market. The drop comes about in the midst of rising commodity prices in the international markets, increasing pressure of import payments on the bank and the uncertain geopolitical situation in Afghanistan.
The drop came about on the same day that the international market saw the benchmark Brent crude price hit a three-year high of around $80 per barrel.
Data from the State Bank of Pakistan (SBP) shows that the rupee has devalued 7.65% or Rs12.06 since the beginning of the ongoing fiscal year on July 1, 2021. Last Monday saw a further decline of 0.31% or Rs 0.52.
Market speculation suggests that exporters have withdrawn from selling dollars in the inter-bank market due to rumors regarding the depreciation of rupee to around Rs200. “We see rupee trading in the range of Rs165-170 over the next six months,” Rauf commented. The currency has dropped in value by 11.38% or Rs17.33 ever since its peak in May of 2021, at a 22-month high of Rs152.27 against the US dollar.
In line with the view that the volatile geopolitical situation in the region following the retreat of US from Afghanistan and the seizing of Power by Taliban, is impacting the rupee. Abbas said “Any change in the political setup in Kabul directly or indirectly impacts Islamabad and its economy.”
Talking about the dollar inflows coming into Pakistan during the years NATO and the US forces were in Afghanistan, a leading businessman said that “This supply has vanished following the return of US and NATO forces back to their homelands at the end of the war,” he said.
Talks with the International Monetary Fund (IMF) being held for the resumption of $6 billion loan programme are not seen as a significant factor impacting the downward trend of the rupee, however, it is projected that the currency might stabilize if the talks conclude successfully.
Head of Research at Arif Habib Limited Tahir Abbas noted, “The rupee volatility will end with successful conclusion of talks between Pakistan and the IMF in October,”
Head of Research at Ismail Iqbal Securities said, “Panic buying of dollar has caused the rupee’s slide,”
Since, the central bank has followed the policy of keeping the exchange rate flexible in order to allow markets to decide the value of the rupee, the parity between the currencies is not a part of the talks with IMF.
“Pakistan has clearly stated that it will resume the IMF programme,” Abbas said. He further explained that if the talks are successful, the IMF loan would contribute to stabilizing the rupee at around current levels.
The resumption of the programme with IMF will lead to the release of $1 billion in IMF loan tranche. It will further open avenues of global financing for Pakistan.
“In case, the two sides fail to find a middle ground and talks end on an unsuccessful note, the rupee may cross several limits on the downside,” he said.
He said that the SBP and the government were taking corrective measures to promote economic growth. Imbalances in the economic growth will be addressed by imposing regulatory duties on imports, limitations on the financing of luxury cars and a 100% submission of import payment at the time of opening of letters of credit.
Rauf added that the real effective exchange rate (REER) – Pakistan’s cost of trade with the world – had led to an improvement of 97 points from over 102 points a few months ago. “This suggests the rupee will consolidate around current levels.”