The Pakistani rupee will remain under pressure and is expected to hit a new all-time low against the US dollar this week as the import bill soars after the worst floods to hit the country and at least US$30 billion in financial damage to the economy -dollar inflicts .
The rupee, which has lost 8.27 percent of its value so far this month, is unlikely to reverse the downtrend and could continue to fall due to political instability, shrinking foreign exchange reserves, slow economic growth and lower-than-expected foreign exchange inflows from friendly countries despite the revival of the expanded fund facility by the IMF of $6.5 billion last month.
The South Asian nation’s currency has fallen 7.7 percent against the greenback over the past 11 straight sessions as investors remained concerned about the widening trade deficit. It ended the week on Friday at 236.84 (64.53 against the dirham) in the interbank market, just 3.1 rupees below the all-time low of 239.94 rupees (65.37 against the dirham) on 28 July 2022.
“The rupee is under severe pressure and could make fresh lows against the US dollar as greenback demand is high in the market. If dollar supply remains tight, the rupee could breach the 250 psychological barrier against the dollar (68.11 against the dirham). this month,” according to FX market insiders.
Why the rupee is shrinking
The rupee has lost 15.62 percent of its value in the current fiscal year 2022-23. However, it shrank 34.18 percent in calendar year 2022 as demand for the US dollar remained high in the market.
Analysts said the rupee’s losing streak can be attributed to a variety of reasons, including low dollar inflows, an expected surge in food imports linked to devastating floods and higher debt servicing in fiscal 2022-23. In addition, political uncertainty also weighed on the rupee as local investors headed abroad to secure their business interests.
Moreover, despite the IMF securing funding last month, foreign exchange inflows have yet to pick up, putting pressure on the country’s foreign exchange reserves, which fell $176 million to $8.62 billion as of September 9, 2022 . The country’s reserves are just enough for a month of imports.
“The floods have caused at least $30 billion in financial losses to the economy, and the country’s GDP growth will be about 3 percent this year, compared to an initial target of 5 percent set in the budget in June ‘ said one analyst.
effects of flooding
Samiullah Tariq, head of research at Pakistan Kuwait Investment Company, said the rupee will continue to depreciate as the country’s economy faces huge financial losses due to flooding.
“Demand in US dollars is higher than supply due to rising imports as the floods have destroyed the exportable surplus and the country will have no choice but to import even agricultural products after the floods,” Tariq told the Khaleej Times on Sunday .
In its latest report, rating agency Fitch also estimates that Pakistan’s current account deficit has reached US$17 billion, or 4.6 percent of GDP, in fiscal 2021-22 due to rising global oil prices and a surge in non-oil imports, as well as strong private consumption.
“Tax tightening, higher interest rates, measures to limit energy use and imports support our forecast of a reduction in the current account deficit to $10 billion (2.6 percent of GDP) in fiscal 2022-23.
Conduct new elections
Muzammil Aslam, an economist, said the rupee will remain under pressure unless the government secures an external debt restructuring and boosts investor confidence by announcing new elections in the country.
“The declining rupee is a new normal under the current regime as low foreign exchange inflows, reduced aid from friendly countries, capital controls and unjustified trade restrictions put pressure on the currency. This has caused disruption to the financial echo system as trade has shifted from banking channels to informal exchanges due to various obstacles,” Aslam told the Khaleej Times.
H said the earthquakes of 2005 and 2010 brought enormous foreign aid, but this time aid was less than expected due to donor fatigue.
“The ongoing flooding could further weigh on the external situation,” he said.
Gray market shines
Zafar Paracha, secretary-general of the Exchange Companies Association of Pakistan, said the dollar is being sold informally on the gray market and the government should take serious action to stop the practice.
“We may see a repeat of July when the Erupee plummeted from 210 to 230 in a matter of days. The only difference is that then the interbank market led the rally and this time the open market,” Paracha told Khaleej Times.
He said exchange firms that were selling between $25 million and $30 million a day are now unable to sell that much because of high demand in the market.
“We are endeavoring to ensure that the open market dollar rate does not rise above Rs240, but rates in the interbank and gray markets are rising,” Paracha said.
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