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PKR falls off a cliff: Loses 32.9 rupees per US dollar in a week

Pakistan’s official reserve assets stand at $7.9bn as of January 31: SBP
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January 27, 2023 (MLN): Removing the dollar cap and switching to a free float exchange rate system has forced the Pakistani rupee (PKR) down the abyss as the currency lost 32.9 rupees in five straight sessions to settle the week’s trade at PKR 262.6 per USD compared to previous week’s close of PKR 229.67 per USD.

Within the last two sessions, the local unit has slashed its value against the US dollar by 31.7 rupees as a result of the decision pertaining to the removal of the dollar cap in the open market on Wednesday. Later, on Thursday the currency also started taking a nosedive in the interbank market, reflecting the government’s clear intention to implement a free-floating exchange rate.

Following yesterday’s trend, PKR lost 7.2 rupees against the greenback with quotes being recorded in a range of 9 rupees per USD showing an intraday high bid of 264 and an intraday low offer of 258 per USD. While in the open market, PKR was traded at 264.5/268 per USD.

It is pertinent to mention that following yesterday’s announcement by the Exchange Companies (ECs) regarding the removal of the dollar cap in the open market, the dollar in Wednesday’s open market was reportedly traded at PKR 252.50 [10:00 am] per USD during initial trading hours, however, within an hour, the greenback depreciated to PKR 243 per USD down by 4% [11:00 am] in the open market, raising suspicions of undue intervention from authorities.

However, speaking to Mettis Global, Malik Bostan President of the Forex Association of Pakistan said, “The drastic appreciation and depreciation within an hour was only due to speculative elements as we have only removed the cap from dollar rates.”

The rates will be purely determined by the demand and supply available in the market, he added.

Right after this sharp depreciation, the International Monetary Fund (IMF) announced that it will send a staff mission to Pakistan on January 31 to complete talks on the ninth quarterly review of a funding program that has been pending for four months.

The Fund's resident representative in Islamabad, Esther Perez Ruiz, stated that the mission will focus on policies to restore domestic and external sustainability in Pakistan, including measures to strengthen the country's fiscal position and support those affected by floods.

The mission will also work to restore the viability of the power sector and re-establish the proper functioning of the foreign exchange market.

Experts are of the view that the decision to cap the dollar rate at the open market in Pakistan has had unforeseen consequences. The cap has created a black or gray market for dollars, as individuals and businesses look for ways to access the currency at a more favorable rate.

Sana Tawfik, Analyst at Arif Habib Limited said, "The SBP had allowed this depreciation of the currency in order to make imports expensive and incentivize exports. As a consequence of continuous PKR depreciation and controls imposed by the Central Bank on imports, the current account deficit came down significantly in 1HFY23, marking a 60% decline.

However, by letting the market determine the exchange rate, pressure on the currency may mount given low reserve levels, she added.

To note, foreign exchange reserves held by the State Bank of Pakistan (SBP) dropped by $922.8 million to $3.68 billion during the week ended on January 20, 2022, according to the data released by the central bank on Thursday.

The dollar has been on an upward trend since the Shahbaz Shareef government took over, having gained 79.27 rupees.

In FYTD, PKR lost 57.75 rupees or 21.99%, while it plummeted by 12.54% against the USD in the last seven sessions, as per data compiled by Mettis Global.

Meanwhile, the currency lost 8.3 rupees to the Pound Sterling as the day's closing quote stood at PKR 324.95 per GBP, while the previous session closed at PKR 316.61 per GBP.

Similarly, PKR's value weakened by 6.8 rupees against EUR which closed at PKR 285.61 at the interbank today.

On another note, within the money market, the central bank conducted a Shariah-compliant Mudarabah Open Market Operation (OMO) today, in which it injected Rs127 billion into the market for seven days at 17.16%.

The overnight repo rate towards the close of the session was 17.50%/17.75%, whereas the 1-week rate was 17.05%/17.15%.

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Posted on: 2023-01-27T17:42:58+05:00