KARACHI: On Wednesday, the US dollar strengthened against the Pakistani rupee, reaching PKR 227.93 in the interbank foreign exchange market.
The exchange rate marked a marginal increase of five paisas, compared to the previous day’s closing at PKR 227.88.
This session marked the 28th consecutive decline in the value of the Pakistani rupee against the US dollar. The local currency, which was recorded at PKR 223.68 on December 01, 2022, has seen a continuous decline and fell to PKR 227.93.
Notably, the rupee hit an all-time low of PKR 239.94 on July 28, 2022. The prolonged decline in the value of the rupee is attributed to various factors, including the delay in talks with the International Monetary Fund (IMF), preventing the release of the tranche under the Extended Fund Facility (EFF), and the absence of inflows from other sources.
Currency experts suggest that falling foreign exchange reserves and increased demand for import payments have kept the rupee under pressure. The State Bank of Pakistan (SBP) recently lifted the prior condition for opening Letters of Credit (LC) by banks for import proceeds, which had been imposed in May 2022 to control the balance of payments and prevent the outflow of foreign currency.
Data from the Pakistan Bureau of Statistics (PBS) revealed a 32 percent decline in imports, reaching $5.16 billion in December 2022 compared to $7.58 billion in the same month of the previous year. The depletion in foreign exchange reserves, disruptions in the IMF loan program, and restrictions on LCs contributed to the devaluation of the rupee.
As of the week ending December 30, 2022, Pakistan’s total foreign exchange reserves recorded a further decline of $284 million, reaching $11.42 billion. The official foreign exchange reserves of the SBP fell to $5.577 billion, indicating a default situation, as this level can cover only 1.2 months of imports. Ideally, a central bank’s foreign exchange reserves should provide at least three months of import cover.
Analysts at KASB Research noted that the critical low level of foreign exchange reserves may exert additional pressure on the exchange rate. With high debt servicing obligations, the Pakistani rupee may face further depreciation, potentially reaching PKR 265 against the US dollar by the end of the current fiscal year, according to SBP projections.
The challenges posed by the declining reserves and inflationary pressures highlight the need for proactive measures to stabilize the currency and strengthen the country’s economic position. Policymakers are likely to closely monitor these developments and take appropriate steps to address the economic challenges facing Pakistan.
