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.

Published in Dawn, August 24th, 2023