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PKR Review: Shambles wrapped in a travesty

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April 4, 2022 (MLN): Political turmoil, upward rally of commodity prices, a substantial decline in foreign exchange reserves, and deteriorating current account balance have dragged the Pakistani rupee (PKR) under the clouds of gloom and doom once again as it has plunged by PKR6.96 or 3.80% against the greenback in the interbank market during the first quarter of CY22.

In 1QCY22, the home unit crossed the lowest ever mark on March 31, 2021, as it closed at PKR183.48, while the highest close was recorded on February 7 at 174.47 per USD.

In March 2022, the miserable currency lost its worth by Rs6 or 3.27% against the US dollar, compared to the notable appreciation in March 2021, wherein, the local unit secured its position by 3.50%.

All credit goes to the no-confidence motion against the Prime Minister which has badly shaken the sentiments of the market, creating an environment dubious for the local currency.

Exploiting the situation to the core, the speculative elements also remained hyperactive and played their part religiously to sink PKR towards its historic low.

Speaking to Mettis Global, Ahsan Mehanti, Director Arif Habib Group said, “Along with ongoing political noise and weak macros, the speculative elements have encouraged the dollar to dominate further in the interbank market.”

Given this, the Real Effective Exchange Rate (REER) of Pakistan was recorded at 97.91 in February 2022, showing a marginal increase of 0.90% compared to 97.04 recorded in January 2022, triggering the trade competitiveness of the country.

However, it is pertinent to mention that in the month of January 2022, the Pakistani Rupee (PKR) showed strong resistance against the US dollar.  While managing to offset some of its previous losses, the currency remained resilient as it only lost 20 paisa or 0.12% in the interbank market to close the month’s trade at PKR 176.72 per USD, compared to the depreciation of 0.17% in January’21.

It was mainly due to measures taken by the State Bank of Pakistan (SBP) to improve the transparency of exchange companies which have resulted in stabilization.

In addition, the inflows worth $1bn each in terms of IMF tranche and against International Sukuk provided major support to the exchange rate during 1QFY22.

Moreover, the central bank, in its recent move with an objective to improve foreign exchange inflows in the interbank market and facilitate exporters and encourage timely inflow of export proceeds, has enhanced the scope of Export Finance Scheme (EFS) – both conventional as well as Sharia-based, allowing the exporters to obtain financing against their export proceeds through discounting of export bills/receivables.

Discounting of bills/receivables is essentially a financial transaction where the exporter surrenders its future export proceeds and obtains financing in PKR for the remainder of the time period of exports proceeds realization.

Though currency experts hinted at that time that despite the inflows and SBP’s effective policies, the Russia-Ukraine war, and rising commodity prices in the international markets would further hit the current account balance of Pakistan which would pose a serious threat to the PKR stability.

During 9MFY22, the pair USD-PKR moved down with a delta of Rs25.93 per dollar or depreciation of 14.13% while it depreciated by Rs15.29 or 9% in the corresponding period of FY21, as per data compiled by Mettis Global.

All in all, weak macros along with political unrest created a turbulent period of uncertainty for the local unit. The total liquid foreign exchange reserves of the country dropped by a massive $2.885bn or 13.5% WoW to stand at the lowest level of $18.54bn since June 26, 2020, during the week ended on March 25, 2022.

According to the experts, this mammoth decline reflects repayment of external debt, including repayment of a major syndicated loan facility of around $2.3bn from China. The rollover of this syndicated facility is being processed and is expected shortly.

In addition, the payment of $900 million as part of Reko Diq settlement also led to the depletion of the country’s dollar reserves.

Cherry on the top, the delay in the seventh review of the IMF program for the release of around $1bn has also created a vibe of uncertainty. Experts link this delay to the political uncertainty which would pose a key risk to the already dwindling current account balance.

The situation got worst on Sunday when a no-confidence motion against Prime Minister Imran Khan was rejected by the deputy speaker of parliament, ruling it was part of a foreign conspiracy. After the speaker dismissed the no-confidence vote, Imran Khan dissolved assemblies and called an early election. Later, the opposition has also termed it unconstitutional and has filed a petition in Supreme Court (SC) against the issue.

A report by Bloomberg has also warned, “Pakistan’s political turmoil increases the default risk while triggering off further losses in the nation’s bonds and currency.”

As Pakistan is undergoing a turbulent period, economists, market experts and the analyst fraternity are of the view that the early resolution of the crisis and supreme court ruling on the matter can bring some clarity and stability otherwise, the currency will have to endure a sharp decline in days to come, threatening to add inflationary pressure with a possible hike in interest rate.

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Posted on: 2022-04-04T14:41:54+05:00

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