Rupee Slides Against Dollar as Interim Govt Begins

The first working day of the interim government in Karachi led to a significant increase in the US dollar price in the interbank market. The dollar surged by Rs3, reaching Rs291.51 in a single session on Tuesday.

Currency dealers indicated that the market was experiencing greater uncertainty due to the new caretaker government, leading to pressure on the local currency. There were concerns that the interim government, free from political pressures, might closely adhere to IMF directives regarding the exchange rate regime.

On Tuesday, the dollar was traded at Rs291.51, marking a 1.04% increase compared to its previous price of Rs288.49 on August 11.

Bankers noted a rise in the purchase of dollars for import purposes, which is expected to continue in the upcoming days due to the government’s agreement with the IMF to remove all import restrictions.

Also Read: Dollar reaches Rs300 against pkr in open market

The previous government had imposed stringent import restrictions that resulted in saving $20-25 billion in the fiscal year 2023 compared to the previous year. However, these policies were criticized for causing a significant decline in economic activity, leading to a meager GDP growth of 0.3% in FY23.

The relaxation of import restrictions is anticipated to elevate the demand for dollars in the future, contributing to higher dollar prices. The Foreign Exchange Reserves of the State Bank currently stand at approximately $8 billion, while the country requires $25 billion for debt servicing in the fiscal year 2024. Concerns have been raised about the interim government’s capacity to manage the situation in line with IMF conditions.

Currency experts were surprised that the $3 billion IMF bailout program necessitated spending over $20 billion on imports in FY24, in addition to the previous year’s imports of about $49.5 billion. This could potentially put continuous pressure on the exchange rate throughout the fiscal year due to increased imports.

The previous government’s policy of not allowing profits and dividends to leave the country discouraged foreign investors, according to Zafar Paracha, General Secretary of the Exchange Companies Association of Pakistan. State Bank data showed that outflows of profits and dividends decreased by $1 billion in FY23 compared to the preceding year.

However, some analysts believed that the withheld profits were likely in the range of $3-4 billion, although concrete evidence was lacking.

Currency experts in banks also attributed the depreciation of the local currency to the declining trend in remittances and exports. The country experienced an $8.2 billion loss in FY23 due to these declines. This trend persisted in July FY24, with remittances decreasing by 19.3% compared to July FY23.

The open market also reported an appreciation of the dollar, which currency dealers attributed to the upward trend in the interbank market. The dollar appreciated by Rs4 to reach Rs300 in the open market, although the official rates provided by exchange companies are not considered as the market rate. On August 11, the dollar was traded at Rs302 in the last session.