KARACHI: Pakistani rupee has witnessed highly volatile week (February 27 – March 03) making the lowest level of PKR 285.09 to the dollar and recovered to PKR 278.46 to end the week.
Experts believe that uncertainty to continue in the market but inflows make the local currency to recover against the greenback.
During the outgoing week, the foreign exchange market remained highly uncertain. The rupee fell by Rs25.10 or 9.65 per cent against the dollar during February 27 – March 02. However, on March 03, the last trading day, the rupee recovered sharply and ended at PKR 278.46.
READ MORE: Rupee recovers sharply against dollar to end at PKR 278.46
The local currency recorded a massive decline following a rating agency downgraded the country’s currency rating.
Moody’s Investors Service downgraded the Government of Pakistan’s local and foreign currency issuer and senior unsecured debt ratings to Caa3 from Caa1.
Moody’s has also downgraded the rating for the senior unsecured MTN program to Caa3 from Caa1. Concurrently, Moody’s has also changed the outlook to stable from negative.
The decision to downgrade the ratings is driven by Moody’s assessment that Pakistan’s increasingly fragile liquidity and external position significantly raises default risks to a level consistent with a Caa3 rating.
READ MORE: Rupee makes historic low against dollar at PKR 285.09
In particular, the country’s foreign exchange reserves have fallen to extremely low levels, far lower than necessary to cover its imports needs and external debt obligations over the immediate and medium term.
Total foreign exchange reserves of the country improved by $542 million to $9.268 billion by the week ended February 24, 2023. The total foreign exchange reserves of the country were $8.726 billion a week ago i.e. February 17, 2023.
The country’s foreign exchange reserves hit an all-time high of $27.228 billion on August 27, 2021. Since then the foreign exchange reserves have declined by $17.96 billion.
The official foreign exchange reserves of the central bank also increased by $556 million to $3.814 billion by the week ended February 24, 2023 as compared with $3.258 billion a week ago.
The central bank attributed the improvement in the foreign exchange reserves to inflows of $700 million from China.
READ MORE; Rupee plunges by PKR 4.61 to dollar on rating downgrade
The foreign exchange reserves held by the central bank witnessed a record high at $20.146 billion by the week ended August 27, 2021. Since then the official reserves of the SBP dropped by $16.332 billion.
The rupee may get support during the next week owing to a significant decline in imports and contraction in trade deficit.
The trade deficit contracted by 33 per cent to $21.3 billion during the first eight months (July – February) of fiscal year 2022-2023. The fiscal deficit of the country was $31.88 billion during the corresponding months of the last fiscal year.
Imports recorded 23.56 per cent to $40.1 billion during the period under review when compared with $52.45 billion in the same months of the last fiscal year.
READ MORE: Rupee declines by PKR 1.58 to dollar on import payment demand
The massive fall in import bill can be attributed to restrictions applied on imports during the period. The government in May 2022 imposed a ban on import of luxury and non-essential items, which was later lifted in August 2022.
However, certain conditions remained applicable regarding opening of the letter of credit (LC) for import payment.
Exports have also decreased by 8.65 per cent to $18.79 billion during the first eight months of the current fiscal year when compared with $20.57 billion in the corresponding period of the last fiscal year.
