KARACHI: The Pakistani Rupee (PKR) crashed by about 17 per cent against the US dollar in the month of July 2022 owing to weakness in balance of payment and political instability.
The exchange rate was opened at Rs204.85 to the dollar on July 04, 2022 and ended at Rs239.37 at closing on July 29, 2022 at interbank foreign exchange market.
During the month about 17 trading days were observed due to long Eid holidays and bank holiday. The government announced holidays from July 08, 2022 to July 12, 2022 on account of Eid ul Adha. Meanwhile, the due to bank and weekly holidays, the month started on July 04, 2022.
The rupee witnessed a consistent decline during the month and recorded historic low of Rs239.94 to the dollar on July 28, 2022.
Experts believed that the downgrade of rating of Pakistan by three top credit rating agencies deteriorated the outlook of the country. Furthermore, the political conflict further aggravated the situation.
Besides, the massive decline in foreign exchange reserves also put pressure on the dollar demand.
Analysts at Arif Habib Limited said that the fear of free-fall in rupee value has gripped the financial markets and different stakeholders of the economy is that if prudent and timely economic measures are not taken, Pakistan may spiral out of control, much like Sri Lanka.
This accelerated the free fall of Pak Rupee against dollar in the interbank recently. However, to highlight, the initial major depreciation of PKR against dollar was triggered back in April 2022, post Vote of No Confidence leading to political change in the country.
The political risks and shifting paradigms took a toll on the foreign investors/creditors’ confidence, hence contributing largely to bringing Rupee under pressure.
The analysts said that although we believe that the Pak Rupee still has inherent depreciation bias in the long-term, in the short term, we expect some stability to be restored. We attribute this short-term stability conditional upon: inflows from bilateral and multilateral creditors, IMF inflows, and strengthening of some macro-economic variables including current account position along with State Bank of Pakistan’s (SBP) attempts to curb market speculation.
A report released by KASB Research pointed out that exchange rate decline would continue until there is support and funds from the International Monetary Fund (IMF). “This could be another 10-15 per cent decline,” the report stated, adding that however, post clarity on IMF there would be 20-25 per cent recovery in the rupee value.
The analysts at the KASB Research are expecting a fair value of the rupee against dollar at Rs190 – 200.
The report further pointed out that the main challenge is hyperinflation caused by the exchange rate movement. The government could be forced to maintain cuts on imports which could hurt companies who rely on imported raw material. The auto sector is a good example.
It however said that Pakistan would meet its sovereign liabilities, especially of the two bonds maturing in December 2022. “However, the market yields are indicating that the marking is pricing a higher risk of default.”
It further noted that the rupee had been hit hard and is down 51 per cent year to date and 17 per cent in just in the month of July 2022.