Double-edged sword of Rupee devaluation, petrol price rise for Pakistan’s economy

August 16, 2023 (MLN): The devaluation of the Pakistani rupee (PKR) coupled with rising petrol prices is beginning to reshape inflation expectations. This shift could potentially influence the trajectory of monetary policy.

The PKR continues to face immense pressure as the currency has lost around 9.5 rupees or 3.33% since June 27, 2023, while in the open market, the PKR has experienced a loss of 12 rupees or 4.17%.

Recalling the Staff Report issued by the International Monetary Fund (IMF) on July 18, 2023, a market-determined exchange rate was recommended to absorb external pressures.

This means that the government has no power to control the rupee by imposing trade restrictions.

Therefore, import restrictions were lifted, which led to an increased demand for dollars and subsequently weakened the rupee.

Thousands of companies are finding it difficult to obtain import permits for their manufacturing needs due to dollar shortages, resulting in cargoes remaining stuck in ports.

This situation arises as the government restricts the demand for dollars to prevent the depletion of the nation's FX reserves.

Furthermore, the gap between the interbank and open market rate has been steadily widening, and has exceeded the recommended 1.25% threshold set by the International Monetary Fund (IMF) for the past eight consecutive trading sessions.

Adding fuel to the fire, Pakistan's heavy reliance on imported oil exposes it to the escalating global oil prices observed in recent weeks, further impacting the PKR.

Brent Crude prices have risen by 18.05% since June 2023, reaching $85.15.

Domestic petrol prices have witnessed a substantial increase of 14.80% this month.

This will also have an impact on other CPI basket items, such as food, which will also be affected by higher transportation costs, creating a ripple effect.

Given that Pakistan is a net importer, its consumer price index (CPI) basket is sensitive to PKR fluctuations.

To recall, in the first few weeks of CY23, PKR depreciated by around 17%, consequently, MoM CPI jumped by a whopping ~300 basis points from January 2023 to May 2023.

The main factors behind this were the sharp increases in Food inflation by about 350bps MoM and Transport inflation by about 325bps MoM during the same period.

In light of the above, this suggests that MPC will remain restrictive on its next monetary policy, as also suggested by the IMF staff report, to continue a tight, proactive, and data-driven monetary policy going forward.

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