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Unstoppable rupee downslide

Pakistani Rupee (PKR) is consistently pounded by hard economic times and any effort to arrest its downward slide has yielded hardly any satisfactory results.

The downslide is the cumulative impact of short-sighted economic policies followed by the incumbent dis pensation along with untenable economic situation experienced by the country.

It’s a whirlpool of pressure on the economic denominators that have not let the rupee come out of doldrums and started a recovery march. Another blow has now been suffered by the beleaguered rupee when international monetary company Fitch has carried out a downward revision of its forecast for the rupee illustrating that the global rating agency does not expect the economic and geopolitical factors that are putting pressure on the home currency to dissipate soon.

Citing factors such as the worsening trade balance, a tighter US monetary policy, higher structural inflation and the increased outflow of dollars to Afghanistan, it has projected the rupee to weaken to an average of 164 to the dollar this year, compared to the previous projection of 158 and to 180 versus the earlier forecast of 165 in 2022.
On top of that came the US Senate bill seeking sanctions on Pakistan that forced the stock markets to badly tumble.
What has been witnessed recently is that with the KSE-100 index losing 12 per cent value in dollar terms, the PSX has recently experienced its worst moments since April 2020.

The stock market does not affect the economic fundamentals the way the falling rupee does but its decline adds to the economic gloom and has a corresponding negative effect. Pakistan’s exchange rate has already deteriorated by around 12 per cent since early May in response to the escalating current account deficit as the government pushed its expansive monetary and fiscal policies more aggressively for achieving brisk economic growth, fuelling domestic demand and imports.

A weakening currency doesn’t only push up energy and food prices at the expense of the low-middle-income households, it also generates economic uncertainties.

The only good news coming out of this far-spreading gloom is the good news thatthe rupee is finally receiving some help from the government and State Bank in the form of measures to curb imports of non-essential and luxury goods to control the current account deficit and price inflation.

The government is reportedly also preparing a plan to ban the export of perishable commodities for the same reasons. But these ad hoc actions aimed at firefighting the emerging vulnerabilities and avoiding an immediate external-sector crisis should not deflect policymakers’ attention from the structural factors behind the decline of the home currency.

Much to the chagrin of the governmental financial planners, Pakistan has been unable to boost its exports, increase industrial and agricultural productivity, develop sustainable domestic energy sources and implement long-outstanding governance reforms.

This means that the rising global commodity prices will continue to put pressure on the current account and the rupee as is happening now.

The stage has come where the government must come up with long-term solutions to the exchange rate volatility and bridge the gap between inflation rates in Pakistan and its trading partners.

Until then, we can only hope for a less precipitous currency decline, one that would not harm the economy. The projection by Fitch has poured cold water on the prospects of the recovery of the rupee. The forecast of the New York[1]based Fitch, — one of the three major global ratings agencies — for the rupee’s average rate this year is now Rs.164 to the US dollar compared with Rs.158 previously.

A day ago stocks fell nearly 3 per cent while the rupee dropped to a record low at Rs.170.27.

The rupee, which has been termed the worst-performing currency in Asia, seems to have opened the field for the bullish US dollar to move forward unchecked and erode the remaining value of the local currency.

The currency has been losing purchasing power fast in the domestic market as well, causing inflation that has badly hit the general public. On 26 August, 2020, the dollar hit Rs.168.43. Then it started declining and reached Rs.151.83 on 14 May, 2021.

However, the greenback started rising and has appreciated by 6.6 per cent and 9.9 per cent since 14

June and May, 2021, respectively. The State Bank of Pakistan (SBP) had indicated earlier that the dollar could appreciate during the current financial year due to an expected higher current account deficit. Now in its projections for 2022, Fitch expects an average rate of 180 versus a previous forecast of 165.

Fitch are of the opinion that the currency would weaken further and it is based on Pakistan’s worsening terms of trade, tighter US monetary policy, alongside the flow of US dollars out of Pakistan and into Afghanistan.

Analysts say the rupee has been hit by consistently high demand for dollars due to the country’s current account deficit while the Afghan situation is increasing pressure.

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