PKR appreciation – Capitalizing on a global currency’s downturn?

October 30, 2020 (MLN): Pakistan has been riding high on its recent economic successes, be it an improvement in remittances, or a rise in the Current Account Surplus. Despite a prevalent pandemic that still isn’t ready to bid adieu to the country yet, Pakistan has managed to perform exceptionally well as compared to not only emerging economies but also some of the highly advanced nations around the globe.

All of these positive economic factors have allegedly led to an appreciation of the Pakistani Rupee (PKR) by almost 4% against the US Dollar during the Financial Year 2021. In other words, the PKR has risen from 168 per USD to around 160.25 per USD, which by every means is a significant achievement for a country like Pakistan.

Taking it as an opportunity to showcase their relentless efforts and talent to bring the economy back on track, various renowned political personalities credited the Government for taking the right steps at the right time. However, the question that has been bugging many is that should the Government of Pakistan take the entire credit for the appreciation of PKR?

While there is no doubt that their policies and timely actions helped in improving several economic factors, but to say that PKR benefitted from only these factors is slightly fallacious, to say the least. What many have failed to notice or are conveniently ignoring is that the US Dollar itself has depreciated against all the major currencies, thereby naturally helping PKR appreciate.

In fact, the USD Index has fallen by 10% since the imposition of lockdown in March, and by 5% during the ongoing fiscal year. This point is further validated by the Pakistan REER, which suggests that the local currency appreciated by only 2% FYTD against its trading partners.  

The major forces behind the depreciation of the safe-haven seem to be the expectation of stable rates over the next few years as indicated by the Fed, as well as significant quantitative easing. Besides, several countries are now making lesser and lesser use of USD for trading purposes. This comes as a setback to particularly those who see USD as a mechanism to make short term yet high returns.   

Coming to the initial point, to say the PKR has appreciated on its own merit is nothing short of being a bit disingenuous. An example of this would be the change in LSMI growth, which is one of the major economic indicators. As shown in the graph below, the LSMI went up by 19.14% and 20.09% in May and June, whereas PKR declined by 1.79% and 2.94% against USD, respectively. July was the month where both LSMI and PKR followed the same trajectory, before parting ways in August again.

Similarly, if we compare the performance of PKR against the Current Account Balance from March till September, we will notice that both of them are idiosyncratic in all months except March and April. This again goes on to show that while PKR is significantly influenced by the trade performance, it is not entirely dependent on it.

Despite this, several ministers have gone on to credit the incumbent government for this unearned achievement on various platforms, and to be fair to them, it's difficult to gauge whether they are fooling us or being fooled themselves.

Keeping these pointers into consideration, the biggest concern now remains is that whether the local currency would be able to sustain its victory in the coming periods or fall flat on its face once the USD starts gaining prominence again.

The answer to that question is subjective. Nobody knows where PKR is headed not just because of the market-based mechanism in place but also the fact that the rupee is somewhat sentiment-driven. Business Recorder, in one of its research reports, has rightly pointed out how the rupee in March depreciated more than it should have because of the negative sentimentalities in place, and how it is appreciating more than it should because of the bullish sentiments that have taken over.

The Current Account has been in surplus for four out of the past five months, and there have been consistent inflows from multilateral channels, which has made investors and traders hopeful about the direction that the currency would take. This hope and positive outlook regarding PKR is itself the very reason why the currency is doing great and likely to perform even better.

Not just the economic factors, a number of initiatives taken by the State Bank and Government, which includes the launch of Roshan Digital Account, are expected to play a huge role in the performance of PKR.  Roshan Digital Account, whose aim is to help and encourage Non-Resident Pakistanis to invest in capital markets, is already getting an overwhelming response with more than 341 stock investment accounts opened.  

However, merely considering sentiments to predict the trajectory of PKR would be a major understatement of the currency itself. The SBP would not allow too much volatility in the currency market even if it takes PKR to new heights, as the same volatility will come to bite the central bank in the face when the sentiments take a u-turn. It is also important to keep in mind that the current account surplus may take a slight hit owing to the lower interest rates and rising demand, as it would increase the cost of imports.

Copyright Mettis Link News

Posted on: 2020-10-30T14:57:00+05:00

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