NationalVOLUME 17 ISSUE # 6


The Pakistani rupee is going down and down and dipped by an additional Rs1.6 against the US dollar in the inter-bank market in late October to close at a new all-time low of Rs172.78. This took place in the backdrop of the uncertainty about talks between Pakistan and the International Monetary Fund (IMF).

The local currency has lost 7.49% of its value since the start of the calendar year 2021 and 8.82% since the current fiscal year began on July 1, 2021. A major reason for the rising value of the dollar is that imports are not contracting, and were valued at over $6 billion in October. Another reason is the increase in international commodity prices which would keep the import bill on the higher side even if Pakistan managed to reduce the volume of import shipments.There is another element of uncertainty because the delay in resumption of the IMF loan programme has triggered fears of further depreciation of the rupee.

All these factors combined together have depressed the overall market sentiment. In the opinion of experts, the latest drop in the rupee value has been triggered by a ballooning trade deficit coupled with Pakistan’s failure to arrest the constant increase in imports. Besides, there is the likelihood of a further hike in interest rate on the back of rising inflation. It is also apprehended that the IMF programme, if cleared, may resume with harsh and more stringent conditions. Due to all this, the sentiment in equity, fixed income and foreign exchange markets is deteriorating.

The State Bank of Pakistan has recently taken some steps to stop a further fall of the rupee. These range from the imposition of cash margins on hundreds of import items to requiring the purchase of dollars to the biometric verification of buyers. The central bank is trying to stabilise the exchange rate. But unlike in the past, it is not intervening in the currency market in a big way for two reasons. First, learning from past mistakes the central bank has decided in principle to let market forces determine the exchange rates. And second, its forex reserves that cover the merchandise import bill of just over three months are not strong enough to do this, particularly at a time when regional peace remains clouded.

The fall of the rupee — a 100pc increase in the trade deficit (between July and September) — is a standing challenge which is not easy to grapple with. The post-pandemic global economy is very complex and riddled with new structural problems. In 2018-19, when the rupee lost about 32pc value against the US dollar, the government borrowed funds extensively from brotherly and friendly countries. But this option is limited now. The rupee bounced back to gain Rs2.5 against the US dollar in the interbank market as the currency closed the trade at Rs172.78, after Saudi Arabia announced a support package of $4.2 billion for Pakistan. The UAE, China and other countries that we could have turned to for seeking funds have tightened controls over forex spending because of the volatility in the international market. Beijing is now more cautious about the release of its Belt and Road Initiative funds. Saudi Arabia and the UAE are focused on maintaining and even enhancing the import coverage ratio of forex reserves to cope with ongoing uncertainties in the world market.

It may be added here that the rupee has fallen in recent months despite the fact that Pakistan received its due share of forex support from the International Monetary Fund to fight the pandemic. The country also received free vaccines from the World Health Organisation and friendly nations. Besides, a good part of its foreign debt has been rescheduled.

There is a new normal that we must reckon with. Western nations that led vaccine development programmes and initially shared those vaccines free of cost with other nations are now making billions of dollars in increased exports of vaccines and pharmaceutical and healthcare products. Export demand for this category is sure to remain strong in the foreseeable future.

By contrast, countries that are not prepared to exploit this potential demand would remain a net importer of vaccines and pharma and healthcare products. Pakistan is one of them, although lately it is trying to expand the base of its pharma industry and boost exports. Similarly, the country has only recently started exporting cellphones made in Pakistan with foreign collaboration to reduce net imports of smartphones that consume over a billion dollars a year.

As part of its damage control efforts, the SBP has now made bank financing of imported automobiles more difficult in order to reduce the overall merchandise import bill and cut the trade deficit. Needless to say, the key is better external account management. We must export more and import less so that we are a trade surplus. This will automatically strengthen the rupee.