The US dollar has demonstrated a pronounced resurgence, approaching Rs285 in the interbank market, following a dip in mid-October. This recovery, characterized by a 2.8% increase throughout ten sessions, is attributed to decreased inflows and strong demand from importers.
Currency experts have identified several factors contributing to the end of the rupee’s winning streak. A notable cause is the short supply of dollars in the interbank market.
Additionally, expectations for foreign investments from the Middle East have diminished in the wake of Israeli attacks on Gaza. Talks with the IMF regarding the $3bn Stand-By Arrangement have been positive, but experts are sceptical about significant inflows even after the release of the second tranche.
Impact on Pakistan’s Economy
Recent terrorist violence in Pakistan threatens further to destabilize the already fragile political and economic environment. The government remains optimistic about economic stability yet acknowledges the economy’s vulnerability.
The country’s textile sector, a major exporter, is currently struggling with high utility prices and an overall expensive cost of doing business, which poses a challenge to economic activities. While the dollar’s appreciation might be favourable for exporters, it simultaneously risks imported inflation, particularly affecting large-scale manufacturing.
Currency Market Dynamics
The record appreciation of the dollar to Rs307.10 in early September led the government to crack down on illegal currency trade and smuggling. This intervention decreased the dollar rate to Rs276.63 by mid-October, representing a significant drop.
The rupee experienced a downturn last week, losing Rs4 in just five sessions. Export proceeds have been affected due to adjustments against previous export forwards, particularly since the crackdown on the foreign exchange market.
Additionally, the presence of the IMF team and restrictions on banks funding their NOSTROS have led to increased volatility in the USD/PKR exchange rate. The forward premiums for one, two, and three months have notably increased, highlighting the growing stress in the currency market.
