Rupee slides as caretakers assume charge
Pakistani rupee emerged as the worst performing currency in Asia on the first day of the caretaker government as it slumped to a three-month low at Rs291.51 against the US dollar in the inter-bank market on Tuesday.
A host of reasons were behind the rupee’s slide which included strengthening of the dollar globally and the surge in its demand in Pakistan. According to the State Bank of Pakistan’s (SBP) data, the currency dropped 1.04%, or Rs3.02, to Rs291.51 against the greenback in the inter-bank market, maintaining its losing streak for the third consecutive working day.
In the open market, the currency slid 1.33%, or Rs4, to Rs300/$, according to the Exchange Companies Association of Pakistan (ECAP). The difference between exchange rates in the inter-bank and open markets widened to over 2.5%, or Rs8.5, breaching the International Monetary Fund’s (IMF) recommended spread of 1.25% (around Rs4).
Topline Research reported that all the 12 currencies in the MSCI Asia Emerging and Frontier Markets Index lost value in the range of 0.1% to 1% against the US dollar, but Pakistani and Malaysian currencies fell the most at 1% on Tuesday.
Among these currencies, Pakistani currency has faced the largest decline of 26.6% in the past one year and steepest drop of 22.3% in the first eight months of 2023. Reports suggest the US dollar hit over one-month high against peer global currencies on growing worries about the global economic slowdown, particularly China’s growth.
Secondly, oil prices have been on an upward trend in the global market, resulting in an increase in demand for the US dollar in Pakistan, which heavily relies on imported energy to meet domestic needs.
Recent speculation in the market that the rupee would come under a fresh round of depreciation under the caretaker government has proved true. The depreciation was overdue considering the widening gap between demand and supply of the foreign currency.
The previous PDM government, however, did not let it happen to save its political position as it had already put its image on stake by taking a number of tough decisions to stabilise the economy. Talking to The Express Tribune, Ismail Iqbal Securities Head of Research Fahad Rauf said “reports suggest the rupee has depreciated amid rising demand for the US dollar.”
The widening gap between inter-bank and open markets signals that either the rupee will shed more value in inter-bank trading or it would recover in the retail market, which will narrow the difference to the IMF-recommended level of 1.25%.
In both markets, the demand for the US dollar stood high compared to its supply. The IMF said that the gap should not exceed 1.25% in any of the five consecutive working days.
It also asked Pakistan to let market forces determine the exchange rate considering the demand and supply situation and that there should be no restrictions on imports.
Imports are expected to remain equal to the value of export earnings and worker remittances, meaning that there will only be a nominal increase in demand for the dollar from importers. This strategy should stabilise the rupee near current levels in the short run.
In the medium to long run, however, a continued nominal depreciation could not be ruled out considering the currency’s historical trend, he said.
Rauf projected that the rupee would hit a new low at Rs320/$ by the end of June 2024, while the full-year average would be around Rs305/$ for 2023-24.
The departure of finance minister Ishaq Dar at the completion of the government’s parliamentary term on August 9 “has ended the era of controlled rupee and the controlled economy.” Earlier, the rupee hit an all-time low at Rs299 against the US dollar in the inter-bank market in May 2023 amid high political drama and a law and order situation.
It touched a recent high near Rs275/$ in July 2023 after Pakistan achieved a new IMF loan programme of $3 billion in late June 2023.