Is the rupee's recovery sustainable?

Banks continue to brave forex liquidity crunch amidst rising demand for dollars. They are rationing foreign exchange to meet the most crucial demand originating from the most important among all clients.

As of 17th June, the State Bank of Pakistan (SBP) had only about $8.238 billion worth of forex reserves that covered just five weeks of import bills of goods. When the reserves are not enough to cover import bills for three months, they are considered inadequate. That sends a negative signal to the world, leads to panic forex buying at home and makes it too difficult for the central bank to defend the local currency. The local currency unit is under pressure - and loses value.

The rupee has been through this.

Back in August 2021, the SBP forex reserves were at their highest level of $20.074bn, enough to cover a little more than three months of goods' imports. In September 2021, the reserves at $19.253bn still provided three months of import coverage. But from October 2021, the SBP reserves began falling, both in value as well as in terms of import cover.

The possible revival of IMF lending and eventually getting out of the FATF grey list should help set our external sector in order

The rupee came under pressure and lost 7.6 per cent value against the US dollar in the next five months and 10 days - between 1st November 2021 and 10th April 2022 (when Imran Khan was ousted from power).

The rupee began sliding too fast after the change of regime in Islamabad. In less than three months (between 11th April and 24th June) it lost more than 12.3pc value, coming down to 207.48 a US dollar on June 24 from 184.68 a dollar on April 10.

Fundamental reasons for the rupee's weakening - widening trade and current account deficits, growing external debt servicing, low growth in total exports, stagnating foreign investment and signs of weaker growth in remittances were present even before the replacement PTI regime with a PML-N led rainbow coalition government.

The political uncertainty that followed, and country-wide charged protests that the ousted prime minister launched against the new setup, accelerated the rupee's decline.

Delay in the revival of a stalled International Monetary Fund (IMF) loan programme brought about more uncertainty in forex markets amidst already deteriorating fundamentals of the external sector. Both the central bank's forex reserves and the rupee remained on a constant downward slide. (The rupee touched an all-time low of 211.93...

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