Search for Pakistan rupee's all-time low against the US dollar, and you will get similar headlines on several days in the second half of the calendar year. This sums up the currency's performance in 2021.

But the situation has been the case for several years, most notably since 2008.

Pakistan’s rupee has lost value against the US dollar in 11 of the 13 years since 2008, with the recently-concluded 12-month period being its third-worst. The year 2018 remains the one to forget (20.1% down) followed by 2019 in second-place (10.3% lower).

In 2021, it lost 9.4% of its value even after the back-to-back gains posted in the ‘last-minute’ (December 30 and December 31). Still, 2021 would count as the fourth-worst since 2001. Just to put it in context – the rupee started 2001 at a value of 57.95 against the US dollar.

The graph below shows the year-on-year depreciation the rupee suffered in the inter-bank market.

Major reasons for the fall in 2021

This was a period of new lows as the currency bore the brunt of Pakistan’s economic battle with the twin deficits — current account and trade balances.

After kicking off the year at 159.8 against US dollar on January 1, it closed at 176.51. However, this does not convey the complete picture.

The graph underneath shows how the rupee appreciated till May before the fall began. Its high point at 152.28 was followed by nearly 14% depreciation till December 31.

The world began 2021 under the cloud of the pandemic with gradual reopening of global economies and talk of a V-shaped recovery. On the macroeconomic front, Pakistan’s current account remained in the surplus in the early part of the year.

However, as Pakistan’s economy began to stabilise, macroeconomic indicators – read import bill – began to worsen. The massive trade deficit – for long Pakistan economy’s Kryptonite – widened, putting pressure on the rupee.

With the State Bank of Pakistan (SBP) reiterating that the exchange rate now reflects market dynamics – demand and supply of currency – one would get few points for saying that the rupee lost value due to demand for the dollar.

However, when the currency depreciates, exports become cheaper. In Pakistan’s cases, exports did not rise as fast as imports did.

Meanwhile, amid the worsening external account situation, rising inflationary readings and pressure on foreign exchange reserves, the rupee had very little room except to bow down.

The current account deficit continued to widen throughout the current fiscal year with the hike in commodity prices, especially oil, adding to the woes.

“The PKR fall in the second half of the year could be correlated to rise in oil prices in the international markets,” Saad Hashmey, Executive Director at BMA Capital, told Business Recorder.

In terms of numbers, Pakistan’s current account posted a deficit of $7.1 billion for July-November 2021 as against a surplus of $1.9 billion recorded in the previous year. In the month of November alone, Pakistan's CAD widened to $1.91 billion from $1.76 billion in October 2021.

“Pakistan’s import bill started to surge from August onwards,” Malik Bostan, President of the Pakistan Forex Association, told Business Recorder.

He added Pakistan’s economic problems compounded after the situation in Afghanistan worsened, leading to an outflow of dollars and creating pressure on the local currency.

Weaker rupee, high inflation, increase in interest rate

A weaker rupee also resulted in some imported inflation with the Consumer Price Index jumping to 12.3% in December 2021 — a 22-month high.

The SBP, seeing these higher readings for a few months, started increasing the key interest rate, taking it to 9.75% by the end of the year. In the last three Monetary Policy Committee meetings, the interest rate has increased 275 basis points.

The SBP also took other measures to discourage speculative buying and selling of foreign exchange. Earlier, this month it fixed a maximum limit of $100,000 (or equivalent in other foreign currencies) per person per calendar year for buying of foreign currency from Exchange Companies.

Back in October, it imposed restrictions on persons travelling to Afghanistan, who would be allowed to carry only $1,000 per person per visit with a maximum annual limit of $6,000. The measure was taken after reports emerged that US dollars to the tune of millions were being smuggled to Afghanistan on a daily basis, amid political upheaval in the neighbouring country.

It also took steps to curb the rising import bill as it announced a 100% Cash Margin Requirement (CMR) on the import of 525 items.

In another restriction in September, the SBP also mandated commercial banks to share a five-day schedule of upcoming import payments, revising it upwards from the earlier two-day directive. It also directed banks to seek permission for imports that are valued at $500,000 per transaction, cutting in half the original payment ceiling of $1 million, which banks could make without needing central bank authorisation.

Inflows announced, but did not arrest the decline

On the other hand, Pakistan also received a $3-billion deposit from Saudi Arabia to support the country's foreign currency reserves in December, and got an additional inflow of around $2.8 billion from the International Monetary Fund (IMF) as part of its new Special Drawing Rights (SDR) allocation announced in August.

Little helped the rupee decline.

What made it worse was uncertainty over the revival of the IMF programme. While a staff-level agreement for the sixth review was announced, the IMF board will only meet on January 12 this year to decide the fate of the Extended Fund Facility. The approval would see a billion-dollar inflow.

However, more than the inflow, it’s the IMF’s nod that is likely to ‘cool’ the currency market.

Meanwhile, Bostan said he believed the PKR would have fallen to 200 if the measures by the government and the SBP to curb speculation in the market were not taken.

Similar views were shared by Hashmey. “The impact of measures will be reflected in upcoming months,” said Hashmey, expressing hope that the import bill would reduce in February-March.

“Going forward, decline in imports would help the PKR.”

Hashmey added that revival of the IMF programme is important for Pakistan.

“The IMF approval will not only give $1 billion, but will also pave way for other international lenders including the Asian Development Bank and World Bank to provide funding. This will counter the current account deficit pressure.”

Revival of the IMF programme is contingent on Pakistan meeting a prior action plan that includes fiscal measures as part of a broader structural reforms package covering areas from the power sector debt to corporate governance, climate change and trade policy.