The rupee (PKR) has been on a downward spiral for the past few years, losing more than half of its value against the US dollar (USD) since 2018. The PKR last traded at 285.10 against the USD as of November 19, 2023, compared to 110.41 in January 2018. This means that the PKR has depreciated by more than 160% in less than six years.
In the recent weeks rupees has been continuously losing values after the strengthening streak from September 7 to October 30 which was attributed to a successful crackdown on foreign exchange companies by law enforcement agencies. However, some economists argue that by late October, the focus of the crackdown shifted from eliminating speculative activity to reducing imported inflation. This shift, contrary to agreed conditions with the International Monetary Fund (IMF), raised concerns.
Notably, the rupee began to weaken after the State Bank of Pakistan’s decision to disallow forward cover to exporters, driven by legitimate concerns about depleting foreign exchange reserves. The country’s reserves, which hit a low of 4 billion dollars on June 23, had risen to 8,727 million dollars by July 14, following the approval of the 3 billion dollar nine-month Stand-By Arrangement (SBA) by the IMF Board. However, as of November 3, reserves hovered around 7.5 billion dollars.
The current year’s budget projected 6.35 trillion rupees, with 21 billion dollars in loans from external sources. Despite expectations of securing financing from multilateral and bilateral sources, concerns were raised by Moody’s regarding affordable market financing. This concern proved accurate, as the budgeted borrowing from Eurobonds and commercial banks has yet to materialize. International rating agencies, including Moody’s, refrained from upgrading Pakistan’s rating, impacting its ability to access market financing.
K Krustins, Director of sovereigns for APAC at Fitch, emphasized that Pakistan would need significant additional financing beyond IMF disbursements for debt maturities and economic recovery. The risk of insufficient financing exists, despite assurances to the IMF. Consequently, the 25 billion dollars needed for debt repayments from July 2023 onward, in addition to the 3 billion dollars from the IMF, may be inadequate. This shortfall contributes to the absence of a rating upgrade, affecting Pakistan’s capacity to access market financing.
The PKR’s depreciation is a complex and multifaceted phenomenon. The PKR’s depreciation reflects the underlying structural and macroeconomic challenges that Pakistan faces, such as high inflation, large current account deficit, low foreign exchange reserves, high external debt, lower economic growth, and higher fiscal deficit. The rupee’s depreciation is not a problem in itself, but a symptom of a deeper problem that requires a comprehensive and coordinated policy response from the government, the central bank, and other stakeholders.
