Is the rupee poised to depreciate?
Businessmen and investors want to know how long the rupee may remain stable. Many fear that the local currency might lose its worth against the mighty US dollar in the coming weeks and months.
The State Bank of Pakistan (SBP) doesn’t have enough foreign exchange reserves to cover even two months of import bills for goods. This means that the rupee will start losing ground whenever market-driven demand for the dollar spikes. And the dollar demand may spike soon as the SBP further liberalises import payments and outward remittances pick up further pace.
So far, the SBP has successfully saved the exchange rates from the speculative attack on the rupee, thanks to the strong backing of the country’s powerful establishment. It may continue to avert speculative attacks on the rupee in future as well.
However, the central bank or the incoming government cannot do much when the real demand for the dollar increases sharply and the supply cannot match it.
The last tranche of the International Monetary (IMF) Fund’s $3 billion short-term loan is expected in April. Between now and the end of March, the external debt servicing will have to be financed without the IMF money.
That, combined with increased import payments and other regular outflows of foreign exchange, may bring the rupee under pressure. A newly formed weak coalition government and our central bank with low forex reserves may find it too hard to manage that pressure effectively.
A newly formed weak coalition government and low forex reserves with the central bank will make it challenging to manage the pressure on the exchange rate
During seven months of this fiscal year, between July 2023 and Jan 2024, Pakistan’s goods imports consumed $30.95b, whereas exports fetched only $17.78b, according to the Pakistan Bureau of Statistics. That left a huge trade deficit of $13.17b. Luckily, home remittances during this period ($15.83b) outweighed this deficit. Had this not happened, the rupee would have been under immense pressure.
However, the main contributor to shrinkage in the trade deficit was a decline in import bills from $36.03b in seven months of the last fiscal year to $30.95b. An increase in export earnings, from $16.48b in 7MFY23 to $17.78b, played a lesser role.
Regardless of who will be part of the coalition and who will sit on the Opposition benches, the incoming coalition government in Islamabad will understandably try to help revive industrial output and remove supply obstacles through further import liberalisation on the lines of the IMF prescription for the ailing economy. A new coalition government will otherwise find it too difficult to say ‘no’ to the IMF’s demand for it.
The new government (which is yet to be formed but will hopefully be formed by the end of this month) may also like to ensure the continuation of growth in exports. But the ever-growing cost of energy (don’t forget the recent rise in gas, electricity and fuel oil prices), high interest rates, political polarisation and ongoing protests condemning “vote rigging” and “election engineering” will make it too difficult. This means the trade deficit may not shrink as fast in the coming months as it did earlier. Home remittances may well take care of the deficit, though.
That may help only to the extent that the rupee may lose its strength gradually and slowly, or in the best-case scenario, it may remain stable for a while. But the bestcase scenario refers to the materialisation of the promised foreign investment from the Gulf Cooperation Council (GCC) region and a solid thickening of regular net inflows of foreign investment from around the world.
Both seem to be distant possibilities, at least till the end of this fiscal year in June. Foreign investment from GCC will start trickling in only after Saudi Arabia, UAE, and Qatar gather enough practical evidence that the new government is capable of and willing to follow up the investment deals signed during the caretaker setup under the umbrella of the Special Investment Facilitation Council.