There is no end to turmoil in the financial market. The rupee has lost value against the dollar and other major currencies. Although some recovery has been noticed lately, uncertainty about the exchange rate still looms large.

Our exchange rate woes basically emanate from our weak, faltering economy – a narrow industrial base and the rising import-export gap. But there are also other factors involved in the situation. These include external commodity price shocks, the persistent balance-of-payments crisis worsened by this shock and a fiscal crisis which does not seem to end.

The situation took a turn for the worse when Fitch downgraded Pakistan’s rating after the inconclusive IMF staff-level agreement. Later came the S&P downgrade which made the financial markets more jittery. All these combined together made a negative impact on the foreign exchange market.

In the opinion of some experts, our financial markets have overreacted to the recent developments on the economic front. One reason for it has been the political wrangling that has been going on in the country for the past several months. Due to this, the conventional doses of economic remedies have proved ineffective resulting in creeping depreciation and rising inflation.

The latest news that the IMF has endorsed Pakistan’s successfully completing all the required actions for the release of tranche has gone a long way to calm nerves. In the meanwhile, the UAE has also announced the provision of one billion dollars to strengthen Pakistan’s foreign exchange reserves.

A perennial problem that Pakistan faces is the wide gap between exports and imports. Our exports have been stagnating for the last two decades while imports have ballooned. The bane of our imports is the dollar value of petroleum imports which have become more expensive with the rise in international oil prices.

According to the State Bank of Pakistan’s figures, the FY22 petroleum imports have risen to $18.7 billion from $9.7bn last year representing a hefty growth of 92.8 per cent. This has raised the value of our FY22 total import of goods and services to $84.2bn from $62.7bn last year, with a growth rate of 34.3pc. With the FY22 exports of goods and services increasing to $39.4bn from $31.6bn, the pressure on trade and services has mounted inexorably. The FY22 deficit on trade and the services account has increased to $44.8bn from $31.2bn last year, marking a fall of $13.6bn.

June 2022 was a particularly difficult month with regard to petroleum imports which rose to $2.9bn compared to only $1.4bn in May. Except for June, per month petroleum imports were valued at only $1.4bn. This totally upset the foreign exchange metrics. One possible cause for the June petroleum imports is the higher import prices when petroleum products were booked a couple of months ago and their higher value payments struck after approximately two months. Another possibility is that a larger quantum was imported in June.

It is relevant to note here that the imports in July were less than the imports in June, but outflows on account of disinvestments of T-bills and other financial assets by non-residents added to the shortage of dollars in the market. However, record workers’ remittances of $31.2bn in FY22 saved the situation and limited our current account deficit to $17.4bn. This deficit is far larger than the FY21 current account deficit of only $2.8bn and was the main trigger for the hefty depreciation of the rupee. In addition, the current account deficit of June was $2.3bn — 64pc higher than the May deficit. Naturally, the market reacted negatively.

The delayed IMF board meeting also contributed to the market panic. Pakistan initially failed to satisfy the IMF that it has fulfilled all its conditionalities. Things only moved when the Army Chief made an emergency call to the US. Immediately after this the IMF came out with a positive response which buoyed up the markets which have heaved a sigh of relief and are likely to witness reduced volatility in the coming days. It is expected that the rupee might appreciate significantly after the receipt of the IMF tranche.

However, uncertainty hangs heavy in the air because of the fundamental weaknesses of the Pakistan economy. The chaotic market sentiments may continue even after the resumption of the IMF programme. Two different parties ruling in the Centre and Punjab, the largest province of Pakistan, is a factor in the current political and economic instability in Pakistan. In other words, until the political dust settles and a new government is installed following a fair and free general election, the economic outlook will remain murky.