Weakening rupee

Editorial Published August 24, 2023

THE rupee is yet again facing renewed pressure due to multiple factors. These
include a resurging current account deficit on account of rising imports and
slumping exports and remittances; price inflation; shrinking foreign currency
reserves amidst reduced capital inflows; and so on. The home currency
continued to extend its losses yesterday, hitting new record lows of Rs299.64
to a dollar in the interbank market, which has been struggling to catch up with
the open market dollar price to meet the IMF goal of reducing the gap
between the two rates to less than 1.25pc. The ‘notional’ dollar price being
quoted in the open market was 309 and 312 for buying and selling,
respectively. The sellers were, nonetheless, reportedly demanding a
significantly large premium of up to Rs10 per dollar, over and above this rate,
from customers, indicating the resurgence of the ‘grey market’.

The rupee has weakened by almost 25pc since 2023 began, and 4.55pc in the
current fiscal year beginning July 1, after a brief period of stability following
the IMF’s approval of a new loan of $3bn to support Pakistan’s worsening
external account position, and help the country avert imminent default on
foreign debt obligations. Analysts had warned at that time that the ‘respite’
was temporary and that it was only a matter of time before volatility would
return to the country’s foreign exchange market unless additional official
bilateral and multilateral inflows started to trickle in — soon. Many argue that
the rupee’s decline has been triggered by a surge in the demand for foreign
exchange for imports, which have risen by almost a third to $4.2bn in July
from $3.2bn in June after the State Bank removed administrative controls
placed over a year ago to curb imports and contain growth in the runaway
current account deficit. No doubt, this, together with the other factors
mentioned above, are the immediate causes for renewed uncertainty in the
foreign exchange market. However, we need to understand that the rupee’s
slide as well as the causes of the currency market’s continued volatility are
only the symptoms of a far more serious disease, that is, the inherent domestic
structure of the economy. While treating symptoms can provide temporary
relief from pain, long-term stability of the rupee and economic recovery
depend on how quickly we can tackle the structural issues.

 Resurgence (noun): a return to a former condition or activity.

 Slumping (adjective): falling or declining sharply.
 Shrinking (adjective): becoming smaller or less in size.
 Intensify (verb): make (something) more intense.
 Volatility (noun): the state of being liable to sudden or unpredictable
changes.