Rupee’s Continuous Falls Against The Dollar Push It Dangerously Close To A Record Low

The Pakistani rupees declined against the US dollar for the 13th session in a row on Tuesday, as severe floods hindered economic activity in the country. Despite government assurances to the contrary, the market’s perception of the local currency has remained unchanged.

More than 33 million people were affected, over 1,500 people died, and the record floods cost the economy at least $18 billion and maybe as much as $30 billion.

The rupee fell by Rs1.09 per dollar during intraday trading on the interbank market, falling from its previous close of Rs237.91 to Rs239 per dollar.

The dollar is now Rs0.94 short of its all-time high of Rs239.94, which will be reached on July 28, 2022.

The loss can be attributed to a variety of factors, including rising import costs as a result of the worst floods in decades, the country’s dollar reserves depleting, and the country’s continuous surge in dollar demand from domestic importers.

According to an independent economist named Saad Hashmey, the recent drop in the currency was caused by the commencement of floods and their negative impacts on the nation’s external balance since agricultural losses would now have to be made up for through imports amid poor external flows.

The rupee will most likely recover if foreign flows resume, which will happen eventually. It should be noted that the IMF (International Monetary Fund) programme fully supports the country’s external funding commitments.

Despite substantial announcements from the government and institutions, market perceptions of the local unit remain constant, according to Zafar Paracha, secretary general of the Exchange Companies Association of Pakistan.

Saudi Arabia just announced a $3 billion rollover, and the country’s finance minister stated that things will improve in the coming month. Furthermore, the IMF resident official added that the lender will assist Pakistan in its relief and reconstruction operations. Despite such optimistic news, the local unit’s market position has not yet shifted.

There is also a scarcity of US currency on the open market. According to economists, investors’ fears about the consequences of the floods on the economy in general, and the external sector in particular, remain strong. The key problem would be maintaining IMF expectations while allowing for relief and rehabilitation spending.

Samiullah Tariq, Head of Research at Pakistan-Kuwait Investment Company, cited import pressure and a severe liquidity constraint as the two primary causes of the rupee’s depreciation in an interview with Geo.tv.

According to him, Peshawar’s foreign market, which is dominated by Afghan business, is putting pressure on the local currency since there is more demand for dollars than supply.

According to the finance minister, markets will return to normal in 20 days.

Miftah Ismail, Pakistan’s finance minister, warned a day earlier that the floods had cost the country’s economy at least $18 billion and maybe as much as $30 billion, making foreign financial markets “jittery” about Pakistan.

Yes, our bond prices have fallen, and our credit risk has risen. “I believe the market will normalize within 15 to 20 days, and I believe it will recognise that Pakistan is committed to being rational,” he said.

Pakistan’s next large payment, a $1 billion foreign bond, is due in December, and Miftah says it will be made “absolutely.”

Despite receiving IMF assistance of $1.12 billion in late August, central bank reserves presently stand at $8.6 billion, which is just enough for about a month’s worth of imports. The cushion is required to increase to 2.2 months by the end of the year.

Even if the floods generate an additional $4 billion in imports, such as cotton, and a negative impact on exports, Pakistan will still be able to grow reserves, according to Miftah.

However, he estimated that the current account deficit would not expand by more than $2 billion as a result of the floods.