Karachi, September 17, 2023 – Market analysts suggest that the Pakistani Rupee (PKR) is poised to sustain its recent upward trend against the US dollar during next week starting from September 18, 2023.
This positive trajectory is attributed to several factors, including an increase in export earnings, a surge in remittances, and effective government measures to curb speculative activity, which has diminished the demand for dollars in the parallel or unofficial market.
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As of Monday, the rupee closed at 301.16 per dollar, but it gained strength throughout the week, concluding at 296.85 on Friday. Over the course of five trading sessions, the currency appreciated against the dollar by 1.43 percent, equivalent to a 4.31 rupee increase.
Market experts have observed improved liquidity in the foreign exchange market, driven by exporters selling in both the spot and forward markets with substantial volumes. Additionally, the uptick in daily remittances has contributed to the strengthening of the rupee, and this trend is expected to continue gradually.
Furthermore, Pakistan’s current account deficit, which measures the gap between foreign exchange inflows and outflows, decreased by a significant 79 percent month-on-month to $160 million in August. This improvement was seen across all four components: trade, services, primary income, and secondary income.
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The regulatory measures implemented to combat illegal activities in the foreign exchange market have started yielding results. This has resulted in a reduction of the gap between the interbank and open market exchange rates, leading to an improvement in remittances.
Since the crackdown on black market operators began on September 6, a considerable amount of funds, estimated to be in tens of millions of dollars, has returned to Pakistan’s interbank and open markets. The rupee, which reached a record low on September 5, has surged by more than 10 percent from pre-crackdown levels, trading at less than $300 per dollar last week.
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However, it should be noted that the rupee has also faced pressure due to the removal of import restrictions, which has increased the demand for foreign currency. In August, the rupee depreciated by almost 6 percent against the dollar.
Over the past 30 years, the rupee has experienced an average annual depreciation of 7 percent against the US dollar. In the last six years, the depreciation has accelerated, averaging 15 percent annually.
The State Bank of Pakistan’s decision to maintain the policy rate at 22 percent suggests that the country’s economic challenges are not solely driven by demand-related factors. Instead, supply-side issues, fiscal mismanagement, and speculative activities are contributing to the economic difficulties. Increasing interest rates may not address these issues effectively, as they may not stimulate demand (already low) and could potentially exacerbate fiscal pressures. Administrative measures have been deemed a more practical solution.
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However, it’s important to note that the reversal in commodity prices has been slower than desired, and the border with Afghanistan remains porous, allowing for ongoing activities. This could lead to higher import volumes, which are necessary to ensure a smooth supply of goods, thus maintaining the stability of the rupee. As a result, exchange rates may not fall below 285 PKR per dollar (levels observed at the end of July) and are expected to consolidate in the range of 290-295 PKR per dollar.
