Rupee's latest depreciation has wider implications

The rupee depreciated a combined 12.1 percent over the course of two days, after a free-floating exchange rate kicked in on Thursday. The development narrowed to an extent the gap that existed among the inter-bank, open- and black-markets of foreign currency that had crossed Rs25 in the last few months.

Amid this turmoil, media takes a look at the wider implications of the move, which was largely made to meet a key prior condition of the International Monetary Fund (IMF) that said its mission will visit Islamabad at the end of January to continue discussions under the ninth Extended Fund Facility (EFF) review. Pakistan is desperately looking to revive its IMF bailout programme amid fast-depleting foreign exchange reserves that plummeted to $3.7 billion, according to latest data.

Speaking to media, Pak Kuwait Investment Company Head of Research Samiullah Tariq stated that following the depreciation, imports are expected to be cleared from the ports. It is pertinent to mention that several import containers are awaiting clearance as banks refused to retire letters of credit (LCs). "Now that the rupee-dollar parity has achieved equilibrium, banks should begin to retire the LCs," he said. "Therefore in the short run, imports are expected to rise because some essential items became short in the market due to import restrictions."

Earlier, media reported that the country was on the brink of shortage of X-ray, CT and MRI films. Even the pharmaceutical industry was perturbed over its inability to import raw material as banks failed to open LCs because of dollar shortage. "Moreover, since the import containers at the port will now be cleared, there will be a huge inflow of imported material in the market," Tariq added. He was of the view that banks will begin to open LCs for new imports gradually. "All this is expected but we have to wait and watch," he said. "However, in the longer run, once supply chain normalises, imports are expected to decline."

Alpha Beta Core CEO Khurram Schehzad echoed similar views and told media that the recent depreciation in rupee will shrink imports. Ismail Iqbal Securities Head of Research Fahad Rauf told media that "imports are administratively managed". "Given the upcoming spike in prices of imported merchandise, their demand will fall which will bring a partial decline in imported materials in future," said Rauf.

All three analysts predicted an increase in exports. Schehzad said exports proceeds are expected to improve by at least $500 million in the next few months against the numbers of last two months. "These potentially improved inflows due to currency adjustment (and rerouting of flows from Hawala market) should be able to support country's foreign exchange reserves and therefore stabilise the currency parity," said Schehzad.

Rauf stated that in the medium-term, exports will become price competitive therefore, they are expected to increase. In the short-run, export orders that were facing delays will be cleared so there will be a short-lived spike, he said. Speaking about the impact on remittances, Rauf stated that over the past few days, foreign inflows have inched up but "the number is not unusually high". "However, remittances are expected to rise later as the gap between the prices in illegal channels of transferring money and legal channels is decreasing so ultimately people will choose the legal channel," he said. Tariq also predicted remittances to rise.

Schehzad said that "as per the updates from formal channels, a substantial flow of remittances has started flowing in back through the formal channels.