Dollar continues to extend gains, glides past Rs205

After hitting a new peak on Monday, the US dollar extended its gains against the rupee in the interbank market and rose past the Rs205 mark to reach a new high during the early hours of trading on Tuesday — a trend that is largely attributed to the dollar strengthening in global markets, a dearth of dollar inflows and the central bank’s depleting foreign exchange reserves.

According to the Forex Association of Pakistan (FAP), the greenback appreciated Rs1.70 from the previous day’s close of Rs203.90 and climbed to Rs205.50 around 10:30am. (The FAP’s closing rate shows a slight deviation from that of the State Bank of Pakistan, which posted a closing rate of Rs203.86).

Since the inception of the new government in April, the dollar had risen by Rs21 until Monday (June 13), and if current trends continue, it will likely keep moving upward.

Meanwhile, a Dawn report today said the finance minister had failed to come up with any strategy in the budget to save the local currency. The appreciating dollar has not only made imported goods and services prices costlier but is the strongest force pushing inflation in the economy.

Dollar strengthens globally

Head of research at Tresmark, Komal Mansoor, views the rupee’s fall in light of trends in global markets, where the dollar has been gaining ground.

According to a Reuters report, the US dollar stood by a fresh 20-year peak today and just about everything else nursed losses as investors braced for aggressive Federal Reserve rate hikes and a possible recession.

“The dollar’s strength, on the basis of quantitative tightening, is the key driver in the global markets,” Mansoor told Dawn.com. She pointed out that Japan’s Yen was at a 24-year-low and other “major and regional currencies are also at multi-year lows”.

“This is playing in the minds of local traders,” she explained.

Dearth of inflows while IMF loan facility remains stalled

Saad Bin Naseer, director of web-based financial data and analytics portal Mettis Global, highlighted the stalled $6 billion programme with the International Monetary Fund as another factor contributing to the rupee’s fall while the local currency market faces a shortage of the dollar.

The IMF loan facility has been stalled since early April as negotiations with the international money lender remain inconclusive, with the lender earlier expressing reservations over fuel and energy subsidies introduced by the previous PTI government and now over targets set by the new government for the upcoming fiscal year.

The IMF’s representative in Islamabad, Esther Perez Ruiz, told Reuters a day ago that additional measures would be needed to bring Pakistan’s budget for the year 2022-23 in line with the key objectives of its programme with the IMF.

The rupee was under pressure as the targets set by the government in the budget for the fiscal year 2022-23 were not in line with the IMF’s expectations, explained Naseer, adding that “budgetary measures have created uncertainty on the resumption of IMF programme”.

“Until the government is not able to resume the IMF programme, pressure on the rupee will continue,” he said.

Moreover, he added, “the fate of inflows from China [also] remains uncertain”. Pakistan is still awaiting the rollover of a $2.3bn loan from China.

“Furthermore, the rupee is also shedding its value in anticipation of the Financial Action Task Force (FATF) meeting, which will review Pakistan’s actions against money laundering and terror financing,” Naseer noted.

Pakistan has been on the FATF’s grey list for deficiencies in its counter-terror financing and anti-money laundering regimes since June 2018.

While a Dawn report, which cited diplomatic sources in Washington, says that China and other allies are working to get Pakistan off the list, uncertainty is likely to surround the matter until a formal announcement by the global body after its four-day session set to begin today.

Currency dealers, meanwhile, complain that two months have gone since the new coalition government led by the PML-N came to power and yet it is unable to secure any dollar inflows from anywhere creating an ideal situation for speculative forces to manipulate the exchange rates.

The demand for dollars is still high but the rapid appreciation in its price is not justified, they say.

Zafar Paracha, general secretary of the Exchange Companies Association of Pakistan, too cited the uncertainty in the IMF deal. “Our finance minister (Miftah Ismail) himself has admitted that the IMF isn’t happy with this budget,” he told Dawn.com.

He added that at the same time, other parties have also made the IMF deal conditional to their assistance of Pakistan. “The conditions aren’t good, and at the government level, we are not seeing any attempt to rein in the runaway dollar or set the economy in order,” he added.

Depleting foreign exchange reserves

For their part, bankers believe the consistent decline in the SBP’s foreign exchange reserves is the key reason for the weakening of the local currency against the greenback.

They point out that despite record remittances and handsome growth in exports, the rupee remains under pressure due to surging imports and a large current account deficit