KARACHI: The rupee climbed to its highest level against the US dollar in two months on Monday, as the government and the central bank stepped up efforts to curb illegal currency trade and boost foreign exchange reserves.
The rupee closed at 286.76 per dollar in the interbank market, the strongest since July 31, according to data from the State Bank of Pakistan. The currency gained 1.50 rupees to end at 286.50 in the open market, where it is traded freely. The foreign exchange market was closed on Friday for a public holiday.
The rupee has been on an upward trend since early September, when authorities launched a crackdown on the unregulated grey market, where dollars are bought and sold at a premium over the official rate.
The State Bank of Pakistan also introduced structural reforms to improve the transparency and efficiency of the foreign exchange market, and encouraged exporters to sell their dollar earnings.
The rupee was the world’s best-performing currency in September, gaining 6.2 percent against the dollar, according to Bloomberg data. The currency had plunged to a record low of 307 on Sept. 5, amid political uncertainty and a widening current account deficit.
“The rupee’s appreciation reflects the positive impact of the government and the central bank’s measures to address the foreign exchange market issues,” said a currency dealer. “The crackdown on the grey market has reduced the demand for dollars, while the exporters’ selling has increased the supply.”
The rupee’s near-term outlook is expected to be positive, but its medium-term future course will depend on the state of the country’s economic fundamentals, especially the outcome of the International Monetary Fund’s review of its $6 billion loan program and the level of foreign exchange reserves.
The IMF is due to conduct its review of Pakistan’s economic performance under its three-year Extended Fund Facility in late October or early November. The review will determine whether Pakistan will receive the next tranche of $450 million from the IMF, as well as unlock additional funding from other multilateral and bilateral sources.
The interim government, which took charge in August, has vowed to implement the IMF program and secure external financing to ease the pressure on the balance of payments.
The caretaker finance minister, Dr. Shamshad Akhtar, told a Senate committee last week that the government is working to secure $6.3 billion in concessional loans from multilateral lenders such as the World Bank, Asian Development Bank and Islamic Development Bank, and $10 billion in bilateral assistance from China and Saudi Arabia, including an oil facility with deferred payment.
Some analysts believe that the rupee will soon stabilize at around 285 per dollar, as importers resume their purchases after holding back in anticipation of further appreciation.
“As soon as importers sense that the rupee’s momentum is slowing down, they will jump into action,” said an analyst. “When the rupee stops rising by one rupee every day, imports are likely to surge.”
The decline in swap premiums, which reflect the cost of borrowing dollars in exchange for rupees, also indicates a shortage of dollar liquidity in the interbank market and a backlog of import payments.
“The swap premiums are falling because there is no demand for dollars from importers right now,” said analyst said. “But once they start buying dollars again, the premiums will rise and put pressure on the rupee.”