Karachi, June 20, 2023: The Pakistani Rupee (PKR) showed a slight improvement against the US dollar on Tuesday, thanks to a narrowing current account deficit.
The interbank foreign exchange market recorded a gain of four paisas in the rupee’s value, with the day’s closing rate at PKR 287.22 against the dollar, compared to the previous day’s closing of PKR 287.26.
READ MORE: Pakistani Rupee Declines Against US Dollar Due to High Demand at Week’s Start
During the first eleven months (July-May) of the fiscal year 2022-23, Pakistan witnessed a significant reduction of 81 percent in its current account deficit, compared to the corresponding period in the previous fiscal year. According to data released by the State Bank of Pakistan (SBP) from the Balance of Payment (BoP), the deficit decreased to $2.94 billion, down from the $15.16 billion deficit recorded in the same months last year.
Despite this positive development, analysts highlight that the local currency is still under pressure due to a lack of inflows and delays in securing a loan program from the International Monetary Fund (IMF). The failure to secure a tranche of over a billion dollars under the IMF program has further contributed to the challenging situation.
READ MORE: PKR Goes Up 18 Paisas Against Dollar at Interbank Closing
Concerns have arisen among analysts regarding the decline in foreign exchange reserves, which poses a potential threat to the stability of the Pakistani Rupee. Recent data from the State Bank of Pakistan (SBP) indicates that the official foreign exchange reserves have fallen below the one-month import cover level. By the week ending June 2, 2023, the reserves declined by $179 million to $3.912 billion, compared to the previous week’s figure of $4.091 billion (May 26, 2023).
Moreover, Pakistan experienced a substantial increase of 43 percent in its import bill for May 2023, amounting to $4.275 billion compared to April 2023’s $3 billion. This surge can be attributed to the government’s decision to lift restrictions on opening Letters of Credit (LCs) for import payments. Maintaining foreign exchange reserves equivalent to at least three months’ worth of import cover is recommended by international standards, emphasizing the urgency of addressing the situation.
READ MORE: Pakistani Rupee Slips Against Dollar to End at PKR 287.37 in Interbank
The continuous decline in foreign exchange reserves primarily stems from the country’s external debt repayment obligations, underscoring the challenges Pakistan faces in maintaining a favorable balance of payments. Although Pakistan’s foreign exchange reserves reached a record high of $27.228 billion by the week ending August 27, 2023, the country has experienced a significant decrease since then, with reserves declining by $17.893 billion.
The Pakistani Rupee has recently faced substantial pressure due to limited inflows and a challenging political climate. On May 11, 2023, the rupee hit a record low of PKR 298.93 against the US dollar, raising concerns among investors and eroding confidence in the local currency.
READ MORE: Rupee gains 79 paisas to end PKR 287.18 against dollar in interbank
Exchange rates are influenced by various factors, including supply and demand dynamics, market sentiment, and economic indicators. The recent strengthening of the Pakistani Rupee against the US dollar reflects the prevailing economic conditions and emphasizes the immediate need for measures to stabilize the currency.
The State Bank of Pakistan, as the central bank of the country, plays a critical role in managing the exchange rate and implementing policies to foster stability. Restoring confidence in the Pakistani Rupee requires addressing economic challenges, attracting foreign investment, and improving the overall economic outlook through prudent economic policies and structural reforms.
