Sunday April 14, 2024

Rupee continues to inch down against dollar

Dwindling foreign exchange reserves, booming grey market major reasons behind currency's depreciation

By Business Desk
December 23, 2022
A currency dealer counting $100 notes while a stack of Rs500 is placed on table. — AFP/File
A currency dealer counting $100 notes while a stack of Rs500 is placed on table. — AFP/File

The rupee continued a downtrend against the US dollar for a fourth successive session, with negative sentiments on the country's dwindling foreign exchange reserves taking a toll on the local currency.

The local unit closed the day at Rs225.64 against the US dollar in the interbank market compared to losing 0.09% from Thursday’s close of Rs225.43.

The external sector figures are not encouraging for the country as the foreign exchange reserves are dwindling with foreign inflows not in sight yet.

Foreign exchange reserves fell to $6.1 billion in the week ended December 16 — their lowest level since April 2014. The reserves held by the central bank declined $584 million.

In the open market, the domestic currency closed flat at Rs234.7 against the greenback.

Currency dealers believe that administrative measures had been used to artificially manage the rupee-dollar parity, including restrictions on the opening of letters of credit, import bans, and curbs on dollar repatriation.

The real effective exchange rate (REER) declined to Rs98.8 in November from 100.2 in the previous month.

Financial pundits predict that the sentiment on the rupee won’t improve till inflows from friendly countries materialise.

Pakistan had a total external debt servicing obligation of $23 billion in the fiscal year 2022-23, of which $6 billion has been repaid, and $4 billion rolled over. While the government had received commitments to fund the remaining amount, delays in International Monetary Fund (IMF) ninth review have cast a shadow on those commitments.

Moreover, with further repayment obligations of $75 billion during FY24-26, the external account remains in a tight spot. The government estimates disbursements of $103 billion during the next three years to finance the repayments and the current account deficit using a combination of bilateral, private debt, and multilateral flows.

In addition to fostering the grey market, a 10–12% difference between official and unofficial currency rates has a negative impact on remittances from legitimate sources.

Analysts expect the State Bank of Pakistan to gradually relax administrative restrictions once the ninth review of the IMF’s loan programme concludes and other inflows start to manifest.