As a result of the International Monetary Fund’s insistence on a market-driven exchange rate, the rupee may experience additional depreciation in the upcoming week.
The expectation is driven by increased dollar purchases by importers for goods and services payment and the government’s hesitancy to halt the rupee’s devaluation. Over the previous week, the local currency had dropped by 2.63 per cent or Rs8 against the dollar in the interbank market.
Foreign exchange traders anticipate further pressure on the rupee, citing the growing demand for US dollars for import payments and the lack of central bank intervention in line with IMF stipulations.
Foreign Reserves Rise Despite Rupee Depreciation
Interestingly, despite the rupee’s devaluation, the nation has seen an increase in its foreign exchange reserves. The State Bank of Pakistan (SBP)’s foreign exchange reserves climbed by $4.2 billion, at $8.7 billion as of July 14th.
The nation’s total reserves also saw an increase of $4.2 billion, amounting to a total of $14.1 billion. Commercial banks also saw an increase in reserves by $24 million, totalling $5.3 billion. This significant rise in the SBP’s reserves can be attributed to remittances from Saudi Arabia, the International Monetary Fund, and the United Arab Emirates during the past week.
However, while theoretically sound, the IMF’s proposed solutions may not be a perfect fit for Pakistan, as per Tresmark. They argue that the rupee is still undervalued on a real effective exchange rate basis. They suggest using a more scientific method like purchasing power parity to determine its fair value. Nonetheless, the continued depreciation of the rupee and the resulting increase in demand for dollars indicate the government’s inability to persuade the lender despite sufficient evidence.
