October 08, 2020 (MLN): Pakistani Rupee (PKR) has witnessed an appreciation against US Dollar (USD) during the 1QFY21 i.e. PKR gained by Rs 2.34 against the dollar, appreciating 1.417% to close at Rs 165.70 per USD. While USD depreciated by 1.397% against PKR in 1QFY21.
During 1QFY21, PKR closed at an all-time low of 168.43 on August 26, 2020.
With more capital injected by central banks in order to battle with the pandemic, currencies took time to find their levels as capital flows, country’s debt, inflation dynamics, and reserves strength and falling crude oil prices, all played a vital role in determining the exchange rate to settle.
This recovery in PKR has been linked to a positive outlook after the end of COVID-19 lockdowns, signaling economic recovery.
This appreciation is attributable to the current account surplus of $805 million during Jul-Aug FY21 against the deficit of $1.214 billion recorded in Jul-Aug FY21. The surplus during the said period was emanated from higher workers' remittances (up by 31% YoY) and a decline in import goods (down by 13% YoY). This positive development regarding imports started decreasing due to the government’s initiatives of imposing duties.
However, Pakistan's trade deficit in 1QFY21 stood at $5.80 billion compared to a deficit of $5.69 billion from the corresponding period of FY20, showing the deficit worsened by around 2%, having a negative effect on the country's exchange rate on the account of outflows of dollars along with lack of foreign demand for exports.
During the testing times, the inflows from expatriates eased pressure on the country’s currency, resulting in the improvement of foreign reserves position. Moreover, foreign aid worth $2.248 billion (18% disbursement of the annual budget estimates of $12.23 billion) during July-August FY21 from multilateral donors also strengthened the national currency against the greenback.
On the reason for the rise in the PKR against the USD, Pakistan witnessed a gradual increase in foreign investment post-lockdown while increasing COVID-19 cases in the US weakening the dollar position.
It is prudent to mention that Pakistan, as per media reports, will avail Rs 335 billion debt relief from G20 countries till December 2020 to mitigate the negative effects of the pandemic which also supported Pakistani currency.
On the other hand, due to lower interest rate as SBP slashed policy rate cumulatively by 625 basis points for providing liquidity to capital markets amid the coronavirus pandemic, foreign investors started pulling out from capital markets (equities and debt market), resulting in a net outflow of $161 million via Special Convertible Rupee Account (SCRA) during 1QFY21.
However, a closer examination of the value of PKR against USD illustrates a 36% YoY decline between 1QFY21 and 1QFY20, showing an interesting picture of exchange rate policy shifts from managed to market based, taken by State bank of Pakistan in June 2019. The rupee gained by Rs 3.68 during 1QFY20 to close at Rs 156.36 per USD, primarily reflecting stable interest rate and higher inflows in the debt market via SCRA, whereby major inflows came in T-bills.
The massive growth of 137% YoY in foreign investment had been witnessed in the first quarter of FY20 to $886.6 million wherein the country observed investment in portfolio especially in debt securities by the amount of $321.8 million during 1QFY20, leading the national currency to appreciate against US dollar.
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