Uncertainty has been the root cause of any upheaval both on the economic and political fronts, which made severe dents and shook the confidence of the business planners; since last two years or so, a number of reasons have been attributed to the fall in the domestic currency we only pinned hopes that upcoming event would help consolidate, but it failed to trigger any light.
For the last two years, political uncertainty was found responsible for the debacle of currency depreciation. PTI government was held responsible for the currency fall that made economic managers unable to control fiery development leading to an excessive increase in the import bill, further adding to the hefty widening of the current account deficit of $18 billion. After that delay in the IMF agreement or not compliance with the conditions, IMF wanted a free exchange rate policy, falling exports and remittances were held responsible for the fall in the currency value against the dollar.
Each time market observers gave new hope that when the IMF deal would be signed, domestic currency would recover, the previous government would stay for two or three years, the interim government set-up would be delayed, smooth transition of the interim government, new economic team would be the trump card for the economic resolution, new finance minister would easily hold talks with the IMF team for the second review, if the interim government setup to perform well the tenure would be extended, pinning hopes of election in time, IMF wants key structural changes.
The political uncertainty and delay in the IMF agreement were the major factors hitting the economic run-up in the country. During the financial year ended June 30, 2023, remittance recorded a tremendous decline of $4.251 billion to $27.026 billion compared with $31.279 billion. Moreover, pressure has been still mounting that in the first month of the new fiscal year a drop of $483 million to $2.027 billion was seen. The main factor behind the decline has been attributed to the vast difference between the interbank and open market rate which at one time climbed to more than Rs 11, encouraging overseas Pakistanis to send it through exchange companies. While few were bold enough to send their foreign exchange earnings through the gray market, where the premium on each dollar was more than Rs 7, discouraging them to use formal and exchange companies’ route.
For example, if the bank rate is Rs 290, then open market rate is Rs 300, the grey market rate is Rs 307 to Rs 310, then around 15 percent to 20 percent foreign exchange earnings would arrive through informal way.
Besides decline in remittance, exports has been in the minus zone, during the financial year ended June 30, 2023, exports plunged by 12.7 percent to $27.735 billion as compared with $31.782 billion of the corresponding year. Both the revenue generating members of the country in the last fiscal year saw colossal loss of more than $8 billion, just due to political uncertainty and delayed decisions by the so called economic managers. There is no accountability of these losses, only mere reasons for the decline in both the groups.
If we took a glance in FY23 Bangladesh recorded a rise of 2.7 percent to $21.61 billion in remittance while India witnessed a boost of 24 percent to $111 billion. These numbers perhaps are self explanatory that stable currency, strong fundamentals of the economy and stringent governance is necessary to keep economy back on track not only mere slogans could prove vital for improvement in the key indicators.
In a recent country report released in July by the IMF, it categorically said that the exchange rate must be allowed to be market determined to absorb external shocks, maintain competitiveness, and help rebuild international reserves by incentivizing inflows. It is essential to allow the price signals to function unimpeded and bring back FX liquidity into the system. Abstaining from informal influence in the market, including through import management and LC approval guidance, is critical to restoring public trust in the exchange rate system. Appropriate monetary and fiscal policies and strong implementation of reforms will help further build confidence in the rupee and resolve external imbalances.
Moreover, Pakistani authorities recognized the importance of restoring proper and normal FX market functioning and alleviating external pressures, which are key to ensure convergence across markets.
“We therefore reaffirm our commitment to return to a market determined exchange rate and, in line with the Foreign Exchange Regulation Act, banks and exchange companies are at liberty to determine exchange rates between Pakistani rupees and foreign currencies free from any formal or informal influence”, the authorities said.. Specifically, we will refrain from providing guidance or expressing preference to market participants regarding the exchange rate or regulate demand for FX through (either formal or informal) administrative action (¶13). Once proper market functioning is restored, we are committed to maintain the average premium between the interbank and open market rate at no more than 1.25 percent and no less than -1.25 percent during any consecutive 5 business day period.
Adil Ghaffar, CEO, First Equity Modarba said that a rise in the interbank rate was imminent because of the IMF conditions as they want bank and open market rate to have a difference of 1.25 percent. “While observing the last week’s trend the difference between both the markets was around Rs 7, hinting rise at interbank rate”, he said. To match the open market, the interbank shot up another factor was the demand from importers as the banks opened after three days closure, said Adil.
Adil said that the domestic currency has been devaluing on a “piecemeal basis’ ‘, which is certainly getting support from the IMF. For a long time we are witnessing that on an average rupee saw depreciation starting from Rs 270 to now Rs 290, on a piecemeal basis, where IMF encouraged us to trim value in small pauses instead of cutting it by 10 to 12 percent in one go. Adil said this trend is unfriendly for business and gives shocks to every trader and importer as they are unable to decide what kind of business strategy they adopt. It appears that dollar might have a band of Rs 320 to Rs 350.
Ali Nawaz CEO Chase Securities The recent decline in rupee is due to market based exchange rate where the rate of currency is determined by market forces and trade related payments. The ongoing depreciation of the Pakistani rupee demands immediate attention. Whether rooted in economic challenges or IMF conditions, a balanced approach is crucial. The interim government should prioritize transparent communication, structural reforms, export promotion, and responsible monetary policies to stabilize the rupee and restore economic stability.
“In short term, just close the gap between official and unofficial rates and the remittances will themselves flow from formal channels”, Ali said.
“Amid the recent drop in the value of the Pakistani Rupee compared to the US Dollar, we see how both economic and political factors are affecting things”, Sachal Abbasi, research analyst at Pearl Securities.
The current elections could make things uncertain politically, worrying investors and making them less interested in the currency. To handle this, it’s important to keep things stable during the elections and make investors feel confident. Also, the changing interest rates, especially the US increasing theirs, remind us how we need to match our own rates with what’s happening globally. This helps keep our country attractive for investments, he said.
Sachal pointed out that the plans from the IMF to control inflation could also help our currency from losing more value. By following these plans, we can make international lenders trust us more. The idea of letting the market decide the currency’s worth, as the IMF suggests, means we might see some ups and downs in the short term. But it could balance out in the long run. The government’s job right now is crucial. “They need to keep politics stable, stick to the IMF’s plans, and make careful economic choices. All these things together can help our currency stay strong despite the challenges in the world”, he said.
Khurram Schehzad, CEO Alpha Beta Core, said to comply with the IMF conditions, the government has been gradually removing the restrictions allowing imports, which nay have caused Dollar demand to rise.
Another factor raising the demand for Dollar, Khurram said, is that the global prices of crude oil price has hit $88 a barrel. As, we all knew that one third of import bill of the country covers energy products including the crude oil and petroleum products, so any increase in global prices would strain on foreign exchange reserves and therefore create a need for more dollars to foot in the higher import bill”, he said.
However, he was hopeful that after the appointment of finance minister and the new CT economic team, things will start to settle down as their major priority would be to keel the economy on track while staying in the IMF program.
