Pakistani currency is currently in a downward spiral for some time now, having reached record lows, and as of 7th September, a US Dollar is worth 167.23 Pakistani Rupee. During the incumbent regime, the rupee has hit a decade low during August 2020, when it reached a historic low of 168.53.
Interbank closing #ExchangeRate for today:https://t.co/UsSg8BPpHV pic.twitter.com/41OfnPW1ge
— SBP (@StateBank_Pak) September 6, 2021
However, the recent downward spiral began almost in the mid of May 2021 when the rupee took a downward turn after reaching a high of 152.19 a dollar.
Almost four months later today, the rupee is now at its 13-month lowest in September, depreciating almost 9.5 per cent of its value in Mid-May, making the market doubt the promises of economic recovery post-pandemic.
The impact of falling currency was felt in the stock market as they sank on Monday in a noncommittal environment as foreign selling, freefalling rupee, and inflating trade deficit continued to give investors cold feet, traders have reportedly said.
It is worth mentioning that in March 2021, the Pakistani rupee emerged as the world’s best-performing currency, when it appreciated the most (4.09% to Rs153.55) against the US dollar from the opening level of January 1, 2021.
There are different reasons contributing to the fall in the Pakistani Rupee, as some of the experts have said.
Increasing trade deficit
The second month of the current fiscal year 2022 saw the widening of the trade deficit by 133 per cent, data released for the month of August 2021 showed.
The provisional data showed that the imports increased two times more than the increase in exports as the economy reopens. The trade deficit for August 2021 reached $4.05 billion compared to August 2020 when it was $1.740 billion.
The exports for August 2021 reached $2.26 billion compared to $1.58 billion in August last year, showing an increase in exports 42.5 per cent year-on-year. On the other hand, on a month-on-month basis, the exports went down 3.5 per cent from $2.34 billion in July 2021.
The imports, on the other hand, saw an 89.9 per cent increase year-on-year, reaching the highest ever of $6.31 billion in August 2021, and on a month-on-month basis, they increased 12.7 per cent from 5.6 billion in July 2021.
These trade figures became one of the important reasons for the market’s doubtfulness about the Pakistani Rupee.
Read More: Pakistan’s trade deficit widens 133pc in August
Managing Director Kasb Securities A A H Soomro commented on the situation saying that the 10% PKR depreciation in 3.5 months only deters investor & business confidence as the financial planning gets adversely impacted.” He called for action by the government.
10% PkR depreciation in 3.5 months only deters investor & business confidence as the financial planning gets adversely impacted.
Especially in the wake of rising commodity prices & supply shortages. Yes PkR has only shed 8% in 2 years (data cherry picking), it's action time.
— A A H Soomro (@AAHSoomro) September 2, 2021
Inflows of USD from Afghanistan
Afghanistan has been heavily reliant on foreign assistance to meet government expenditure, however with the Taliban’s ascend to power, the foreign powers have frozen the country’s assets, leading to the closure of the sector in the country. This ended the daily inflow of $5-7 million daily to Pakistan.
Similarly, many contractors such as International NGOs and various Intergovernmental Organizations in Afghanistan which employed many Afghans and were part of the economy as consumers have fled the country, leaving the country in economic woes as the sources which were drawing foreign inflows deplete.
As Banks resume their operations, the citizens are fast to convert the fragile local currency into the US dollars, further devaluing the Afghani, which was being kept stable by the central bank by regular USD auctions.
Afghan families based in Pakistan according to various experts are turning PKR to USD and sending them back to their families back home where dollar supply is low due to reasons, resulting in increased demand for the dollar, taking a toll on Rupee.
Since, the State Bank of Pakistan (SBP) has let the currency be dependent on the market forces and is not using the foreign reserves for Open Market Operations to stabilize the parity, the Dollar demand increase, leading to outflow.
Read More: Pakistan to formulate a strategy for the rehabilitation of Afghanistan
However, since the recent change in regime and the rise in uncertainty, Afghan people have been selling Afghani and buying dollars, leading to reported outflow of $1.5 to $2 million from Pakistan, taking a toll on PKR-USD exchange rate.