NationalVOLUME 16 ISSUE # 08

The rising rupee

The Pakistani rupee continues to strengthen against the dollar in recent weeks after uncertainty deepened following elections in the United States, which weakened its currency internationally. The local currency has also gained because of higher remittances and the impact of Covid-19 on global markets. The rupee is expected to gain further, but its positive effects on prices are still not visible, which should be a matter of concern for the government.

By November 15, the exchange rate strengthened on the back of the dollar’s falling value. The US currency has fallen to an eight-month low at Rs158 in the open market. The continuous dollar decline has driven the rupee closer to the value it was at during the opening weeks of 2020. Now the rupee has become the third best-performing currency in Asia. Experts say the development may help tackle high inflation as Pakistan has become an importer of wheat, sugar and cotton this year to improve supplies. Earlier, a shortfall in the production of agricultural commodities caused a surge in their prices in the country.

The rupee has cumulatively regained Rs9.52 or 5.65pc over the past 11 weeks since touching an all-time low of Rs168.43 on August 26. The rupee entered the list of the best-performing currencies in Asia, appreciating by 3.1pc against the US dollar since October 1, 2020, thereby securing the position of the third best-performing currency in Asia after the Indonesian rupiah and the South Korean won. The Indonesian currency regained 4.5pc while the South Korean won recovered 3.6pc since October 1.

The foreign exchange reserves of the State Bank of Pakistan (SBP) are over $12 billion, reflecting a relatively improved condition for the stabilisation of the exchange rate and the SBP takes credit for it. According to SBP Governor Dr Reza Baqir, the central bank played a key role in facilitating higher remittances and its free market mechanism helped stabilise the exchange rate. He claims that it is the first time the rupee has moved in both directions, rising as well as falling, which he says proves that the exchange rate is now market determined. The remittances into the country increased by over 26pc in the first four months of the current fiscal year while the outflow from the country was much lower than the average outflow of last year. The low outflow increased liquidity in the banking system helping the local currency to improve its value. The rupee’s appreciation has forced those holding their savings in dollars to sell the greenback in the open market.

Meanwhile, Pakistan’s current account remained surplus for the fourth consecutive month in October, rising to $382 million or 1.6pc of the gross domestic product (GDP), according to the State Bank of Pakistan. Compared to the same month last year, the surplus increased by 423pc from $73m, while on a month-on-month basis it was up 547pc versus the $59m recorded in September. The surplus came on the back of a sustained increase in remittances and a smaller trade deficit. Since the start of the fiscal year in July, the cumulative current account surplus has reached $1.2 billion, reversing the $1.4b deficit recorded in the same period last year, the SBP added. The current account recorded a fourth consecutive monthly surplus in October. An improvement was witnessed on account of a better trade deficit as imports declined by 9pc month-on-month compared to exports increasing one per cent month-on-month.

On a monthly basis, the trade deficit in October narrowed by 20pc to $1.49b from $1.86b in September. Remittances during the month were $2.284b, unchanged from the previous month. The current account has been helped by a significant increase in remittances during the current fiscal year. In the four-month period from July to October, total inflows of remittances have risen to $9.43b — up 26.5pc — compared to $7.45b in the same period last year. On the other hand, during the same July-October period, the country’s trade balance in goods has risen by 4pc to $6.74b from $6.48b during the same period last year, while the services trade balance narrowed by 38pc to $785m compared to $1.27b. In a press release, the SBP said the country’s total foreign exchange reserves had crossed the $20b mark during the week that ended on Nov 13. “The SBP reserves have increased to $12.93b as of Nov 13, 2020, which is the highest level since February 2, 2018. Total liquid foreign reserves held by the country rose to $20.08b,” a press release said. Experts said the reserves had increased due to inflows from lenders, like the International Monetary Fund, World Bank, Asian Development Bank etc.; a low trade deficit; high remittances coupled with less outflows in the form of education and travel expenses due to the pandemic.

However, despite the positive developments, inflation remains high in the country, which is the real issue of the common man. According to the Pakistan Bureau of Statistics, rural food inflation rose more rapidly as compared to the urban food price hike in October. Food prices in the urban areas increased by 13.9pc and by 17.7pc in the rural areas. Initially, food inflation was pushed by the increasing shortage of wheat and sugar in the country. However, the current wave of inflation is mostly driven by a sharp hike in the prices of fresh vegetables, pulses and eggs, which are used on a daily basis by the low and middle-income segments of the population. The State Bank of Pakistan has repeatedly blamed supply-side constraints and disruptions for the increase in food prices. However, the government could not improve the situation despite being aware of the problem.