Karachi, June 15, 2023: The Pakistani Rupee (PKR) experienced a decline against the dollar on Thursday, primarily driven by looming default threats and concerns over the country’s foreign exchange reserves.
The exchange rate recorded a 19 paisas drop, ending at PKR 287.37 to the dollar in the interbank foreign exchange market, compared to the previous day’s closing rate of PKR 287.18.
READ MORE: Rupee gains 79 paisas to end PKR 287.18 against dollar in interbank
Currency analysts attribute the fall in the local currency to a recent warning from an international rating agency, indicating the potential default on external payments in the absence of an IMF loan program. Despite concerted efforts, Pakistan has been unable to secure a tranche of over a billion dollars under this program, further exacerbating the situation.
The decline in foreign exchange reserves has raised significant concerns among analysts, as it poses a potential threat to the stability of the rupee. Recent data from the State Bank of Pakistan (SBP) reveals that the official foreign exchange reserves have fallen below the one-month import cover level. As of 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).
READ MORE: Rupee Declines Against Dollar to PKR 286.93 as Foreign Exchange Reserves Plummet
Moreover, the country’s import bill for May 2023 witnessed a considerable increase of 43 percent, amounting to $4.275 billion, compared to April 2023’s $3 billion. This surge can be primarily attributed to the government’s decision to lift restrictions on opening Letters of Credit (LCs) for import payments. International standards recommend that a central bank should maintain foreign exchange reserves equivalent to at least three months’ worth of import cover, highlighting the urgency of the situation.
The continuous decline in foreign exchange reserves is largely driven by the country’s external debt repayment obligations, underscoring the challenges faced by Pakistan in maintaining a favorable balance of payments. Notably, Pakistan’s foreign exchange reserves reached a record high of $27.228 billion by the week ending August 27, 2023. However, since then, the country has experienced a significant decrease, with reserves declining by $17.893 billion.
READ MORE: Rupee Ends Four Day Losing Streak
The Pakistani Rupee has faced substantial pressure in recent weeks 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, creating concerns among investors and eroding confidence in the local currency.
The exchange rate is influenced by various factors, including supply and demand dynamics, market sentiment, and economic indicators. The recent devaluation of the Pakistani Rupee against the US dollar reflects the prevailing economic conditions and underscores the immediate need for measures to stabilize the currency.
As the central bank of the country, the State Bank of Pakistan plays a critical role in managing the exchange rate and implementing policies to foster stability. To restore confidence in the Pakistani Rupee, the government must address economic challenges, attract foreign investment, and improve the overall economic outlook through prudent economic policies and structural reforms.
READ MORE: Pakistani Rupee Extends Losses for Fourth Consecutive Session Against US Dollar
Market participants, policymakers, and financial experts will closely monitor exchange rate movements to assess their potential impact on various sectors of the economy. By analyzing these fluctuations and developing strategies, efforts will be made to mitigate factors contributing to volatility in the foreign exchange market.
