The Falling Rupee

The Falling Rupee

In an unexpected move, Pakistani currency slumped to a year-low level of Rs. 166.28 against the US dollar in the inter-bank market that added to the cost of imports, pushed up inflation and jolted the stock market on August 25.

The sharp slide in the value of the rupee raised eyebrows. People in and out of business questioned what went wrong in the domestic economy to trigger the fall and what was the outlook on rupee-dollar parity?

To investigate the conditions, situations and forces that pushed the rupee down and the future outlook, we reached out to experts belonging to different walks of life, including economists, businessmen, currency dealers and stockbrokers.

The rupee depreciated by 5.6 percent (or Rs. 8.85) over the past two months – or since the beginning of the current fiscal year on July 1 — to Rs. 166.28 on August 25, according to the State Bank of Pakistan’s (SBP) data.

It lost 9.2 percent (or Rs. 14) since it hit a 22-month high at Rs. 152.27 three months ago in May 2021.

After the sharp drop of Rs. 1.08 to the year-low level of Rs. 166.28, on the very next day, Pakistan received $2.75 billion from the International Monetary Fund (IMF) under its new allocations of Special Drawing Rights (SDR) — the IMF virtual currency — for its member countries to help them combat the challenges of the Covid-19 pandemic, enhance their capacity to make international payments for imports and foreign debt repayments and to stimulate the global economy. The inflows increased the country’s SBP-held foreign exchange reserves by a staggering 16 percent to an all-time high at $20.4 billion, according to AHL Research.

The surge in the reserves apparently increased the supply of dollars in the domestic economy against the demand for foreign currency. They, however, failed to break the downward streak in the rupee or pull it up against the greenback initially.

These developments (reserves up, rupee down) contradict the theory that the rupee moves up or down against the dollar in accordance with the situation of demand and supply of the foreign currency in the economy.

Market speculations suggest the authorities concerned let the rupee devalue to the level fit for resumption of the IMF’s $6 billion loan programme that is on hold as the two sides agreed to delay the sixth review of the economy till September. They delayed the review in the wake of disagreement on the lender’s conditions to increase price of power to address circular debt in the energy sector and increase taxes to boost collection of revenue.

Pakistan and IMF teams are to hold staff level talks for resumption of the programme in September, as the two sides remained engaged on technical talks to find a middle ground on conditions and resume the sixth review of the domestic economy under the 39-month loan programme.

The local currency made a cumulative recovery of Rs. 0.66 to Rs. 165.62 over the next two days, (August 26 & 27), “suggesting the rupee had bottomed out (at the one-year low of Rs. 166.28),” says leading stockbroker Aqeel Karim Dehdhi. “The downward streak in the rupee was largely based on market speculation, and was not genuine. The regulator (SBP) should play a proactive role to ensure the currency markets operate on genuine grounds and speculative elements remain out of the business,” he said. “Pakistan Stock Exchange (PSX) is feeling the heat of the burning rupee. The recent gains achieved on share prices have been partially lost to the rupee slump… in comparison, global stock markets have continued to maintain the record making and breaking spree these days,” says Dedhi.

He points out that almost all the economic indicators were moving in the positive direction. The foreign currency inflows on account of workers’ remittances and Roshan Digital Account (RDA) were on the rise for all the right reasons. There were no negative indicators in the domestic economy. “The (sudden and excessive) drop in rupee is not in the interest of Pakistan. It is expected to rebound to Rs. 163-164 against the US dollar by end-August,” Dhedhi said.

M. Abdul Aleem, Secretary General, Overseas Investors Chamber of Commerce and Industry (OICC) says that “in the wake of the recent fluctuation in the rupee, industries have priced the rupee at around 160-162 (against the US dollar) till December 2021 to take decisions on new investment and assess working capital in Pakistan.” Topline Research estimated that “the rupee may depreciate by around 6 percent in fiscal year 2022 against the US Dollar, with us eyeing June-2022 closing in the range of 168-170.”The rupee hit all-time low at Rs. 167.43 on August 27, 2020, according to SBP data.

Malik Bostan, President of the Pakistan Forex Association (PFA) linked weakening of the rupee with strengthening of the Taliban in Afghanistan, as they returned to power in a dramatic drop scene of the 20-year US-led war in the landlocked state.The Taliban are in need of US dollars to run the country. The US, however, has denied access of the new political regime to Afghanistan’s foreign exchange reserves amounting to $9-10 billion (enough for 15-month import cover). The reserves are mostly parked in US banks and invested there.

“The unfolding political situation in Afghanistan would have activated currency smugglers to supply US dollars from Pakistan to Afghanistan,” said Bostan. The situation mounted pressure on the rupee as Pakistan itself remained a dollar deficit country. Its import payments and foreign debt repayments have continued to mount with the passage of time.

The trade deficit — the difference between higher import payments and sluggish export earnings — swelled 85.53 percent to $3.10 billion in July compared to $1.67 billion in the same month last year, according to the latest numbers.

Besides, Pakistan may need additional foreign financing to provide food, medicine and shelter in case more Afghans cross the Durand Line to take refugee in Pakistan in the wake of socio-economic and political uncertainty in Kabul. “Estimates suggest some 700,000 Afghanis may take refugees in Pakistan if civil war breaks out there. They will be in addition to 1.4 million Afghan refugees already living in Pakistan for decades,” he said.

Samiullah Tariq, Head of Research, Pak-Kuwait Investment Company (PKIC) found nothing wrong with the mechanism put in place to determine the value of the rupee against the dollar and rejected almost all the speculative and conspiracy theories associated with the latest rupee’s downturn. “It is market forces that are determining the rupee-dollar parity under the market-based exchange-rate mechanism. It works depending upon the situation of demand and supply of the dollars in the inter-bank market,” he said. “The flexible exchange-rate mechanism does not allow using IMF inflows ($2.75 billion) to defend local currency, as they are meant to repay previous foreign debt (and/or maintaining the foreign exchange reserves on the higher side),” he said.

Accordingly, the rupee has lost value in the wake of a surge in demand for dollars to finance rising imports. Pakistan’s imports surged slightly more than double to $5.39 billion in July compared to $3.55 billion in the same month last year. In the prior month of June, the imports soared to all-time high at $6.30 billion. The flexible exchange-rate mechanism works in a way that it discourages unnecessary imports and encourages exports — creating a balance in the country’s external trade.

Aqeel Karim Dehdhi also said the inflow of currencies on accounts of workers’ remittances and export earnings would cumulatively remain higher compared to outflows for imports during the current fiscal year 2022. “Pakistan is poised to attract $5 billion on account of unconventional remittances through Roshan Digital Account (RDA). They stand at $2 billion at present. The development would support the rupee to regain its lost value.” 

Textile exporters have always been a strong lobby in all governments, as they believe the weak rupee would strongly increase export earnings. “The strategy (weaker rupee to grow exports) has never achieved the desired goal, but mostly mounted pressure on the economy,” maintains Dhedhi. The share of textiles in total export earnings has continued to remain around 60 percent for several years.

M. Abdul Aleem said the majority of imports remain necessary, as the country mostly imports raw materials for industries, edible items (like wheat, sugar and cooking oil), energy (oil and gas) and plants and machinery. “Such imports remain necessary for export industries as well,” he said. He expected the rupee would partially regain the lost ground against the greenback, as inflows of foreign currencies are on the rise under different heads. “However, one should not expect the rupee to return to the recent high value of Rs. 152-153 (seen last time in May 2021).”

Prime Minister Imran Khan and his economic team have taken notice of excessive imports, especially of luxury items like cars. They are determined to cut unnecessary imports. This should also support the rupee to rebound and stay stable, going forward.

By Salman Siddiqui

The writer is a Karachi-based business journalist.

Dispatches from Chundrigar Rd