Pak rupee – not out of the woods yet

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KARACHI:

There has been a recent decline in the Pakistani rupee against the basket of major currencies, primarily the US dollar, where the rout has intensified in recent times, hitting a multi-year low of Rs 169 in the forex market before the State Bank is stepping in in an effort to curb the excitement of speculators.

While there is no official account of what exactly happened behind the scenes, the odds are against the balance of payments in general and the long term stability of the rupee in particular.

Despite Pakistan’s gross foreign exchange reserves reaching an all-time high of $ 20 billion after recently receiving $ 2.75 billion in Special Drawing Rights (SDRs) from the International Monetary Fund (IMF), speculators saw an opportunity in the forex market due to the increasing current account deficit and poor performance in other avenues of investment.

Lately, as the KSE 100 equities index had just moved in a narrow 1000 point band for many weeks, speculators took refuge in stacks of US dollars to generate returns as gold also lost. of its brilliance due to the rising value of the dollar.

The strategy of holding the US dollar has largely beaten stocks and gold. Another local factor is political uncertainty in Kabul, which increases the demand for dollars by Afghan nationals in the Pakistani market.

The trade deficit has been emerging in recent times as economic activity picks up and pent-up post-pandemic demand is on the rise.

It is certainly not raining but it is raining heavily for the PTI government as energy prices rise steadily around the world putting pressure on inflation and current accounts and will eventually force the State Bank to use the next tool in its toolkit, the interest rate.

In addition to local and regional dynamics, the dollar has already hit an almost 21-day high against a basket of major currencies after the unexpected US retail sales figures, which came last week in stark contrast to the fear of a slowdown in US economic growth. .

August’s US retail sales data sheds some clarity on both the downward direction and interest rate direction by the US Federal Reserve. The tapering usually lifts the dollar as it suggests the Fed is one step closer to tighter monetary policy.

As the Federal Reserve begins to scale back its asset purchase program, the US dollar will tend to rise in the future against major currencies, including the Pakistani rupee.

The only ray of hope so far is the support of non-resident Pakistanis, who have sent record remittances in the year since the outbreak of the Covid-19 pandemic, reaching $ 29.4 billion. dollars in 2020-2021.

In addition, the State Bank’s recent initiative, the Roshan Digital Account (RDA), provided the government with another source to build up foreign exchange reserves, breaking through the $ 2 billion mark.

The recent fall of the rupee could trigger further inflows from the Pakistani diaspora, but these funds should be diverted to constructive avenues, not just to overturn records on plots or to park interest-bearing public debt instruments such as certificates. Naya Pakistan.

Now that we have seen the two extreme models, namely the artificially high rupee during the PML-N era or increasing the interest rate to insanely high levels of 13.25% during the initial period of administration of the PTI, one can hope that reason will prevail in the next decisions of monetary and fiscal policy when the going gets tough.

As the PTI government prepares for its final innings ahead of the 2023 election, it needs to be cautious when it comes to taming the beast of inflation and the growing current account deficit .

As winter approaches and soaring fuel prices in Europe due to declining electricity production from sustainable sources, such as wind and solar, energy prices can easily get out of hand and the recent rise in the price of oil to a record high of Rs123. .79 the liter is already fueling the anger of the masses, who are living on the edge due to rising food prices.

The writer is passionate about financial markets and is committed to Pakistan’s equities, commodities and emerging technologies.

Posted in The Express Tribune, September 20e, 2021.

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