The rupee continues to lose ground against the dollar during the past few weeks. Recently, the dollar closed at over Rs 232 with no end in its slide in sight. On the other hand, the State Bank of Pakistan’s foreign reserves fell to $9.328bn on 15th July (or equal to one-and-a-half month of goods imports) from $11.425bn at the end of March 2022.

Since April 7, when Prime Minister Imran Khan was ousted from power up to the last week of July, the rupee has lost 21.3pc value against the US dollar both due to the rising trade deficit and growing political instability and uncertainty. The rupee had appreciated to Rs204.56 in the first week of July after touching 211.93 on June 22. It then kept losing its value against the dollar but registered a minor appreciation when the country reached its staff-level agreement with the International Monetary Fund (IMF) on July 15. But since then it has continued to fall in every session.

This massive decline in the rupee’s value is bound to fuel inflation further and upset all earning/spending projections of the government, businesses and individual households. All imported as well as locally produced goods made with imported raw materials have become expensive. Inflation figures have gone through the roof.

There are several factors involved in the deplorable plight of the rupee. Apart from political uncertainty due to the Punjab Assembly election mess, which continued until recently, there were many underlying economic reasons. One is the fast tracking of opening of their letters of credit by importers in view of the rupee’s endless fall. It is also reported that exporters have been holding their foreign funds abroad to maximise their returns. Delays by exporters in an effort to maximise their rupee earnings have created chaotic conditions and caused a shortage of the dollar in the forex market. The banks are also partly responsible for what is happening. They are trading the dollar in the interbank market with a big difference between buying and selling rates.

In addition to political instability, structural weaknesses of the external sector, higher global prices of fuel and food commodities, the appreciation of the US dollar against major currencies, geopolitical challenges facing Pakistan and the delay in the revival of the International Monetary Fund’s lending – all these have played a role in making the rupee weak and vulnerable to speculation.

Needless to say, the non-stop appreciation of the dollar is extremely damaging to the economy but the government and the State Bank of Pakistan have not taken practical measures to mend the situation. Instead the State Bank of Pakistan has been offering lame excuses to explain away the phenomenon. For example, recently the SBP attributed the rupee’s fall to the “market-determined exchange rate system” under which the current account position, unverified news reports and domestic uncertainty contribute to the daily currency fluctuations.” In an apparent attempt to downplay the seriousness of the situation, the SBP said on July 20 that a better measure of the rupee’s strength was the real effective exchange rate, which takes into account the currencies in which Pakistan trades.

Now the question is: When will the rupee slide stop?

Nobody has an answer to this question. The situation may ease a little when the IMF’s board approves the revival of its lending programme and releases about $1.17 billion for Pakistan, sometime in the first half of August. It is also hoped that China, Saudi Arabia and the UAE may consider placing a few billion dollars funds in the SBP account. If that happens and our forex reserves are augmented, that may create room for the central bank to lend some support to the rupee.

To arrest the deteriorating situation, experts have advised that the government, in collaboration with the State Bank of Pakistan (SBP), should issue guidelines to ensure that exporters convert their dollar earnings to rupees immediately after receiving payments.

It is time we also attended to the structural weaknesses of our balance of payments calculus. In our balance of payments, the two main sources of forex inflows are (1) remittances and (2) exports of goods and services. And our two main sources of outflows of foreign exchange are (1) imports of goods and services and (2) external debt servicing.

The stark fact is that our total import bill of goods and services continues to eat up more than 90pc of the forex earnings through remittances, total exports and foreign investment. So the government has to borrow in the form of sovereign funds, international commercial loans and BoP support funds from the IMF to avoid external loan default and to keep the central bank’s forex reserves at a comfortable level.

Between July 2021 and May 2022, Pakistan’s total import bill of goods and services stood at ($65.462bn + $10.284) $75.746bn, according to the SBP. Against this, our forex earnings from remittances and exports of goods and services totalled ($28.410bn+$29.333bn+$6.318bn) $64.061bn. Until this gap is filled, our external sector will remain in trouble.