Hammered by the deteriorating macroeconomic situation in the country, the Pakistani rupee witnessed a record level of depreciation against the US dollar in the inter-bank market during fiscal year 2022-23.
The rupee closed at 285.99 against the US dollar on Tuesday (June 27, 2023), after starting the year at Rs204.85 (June 30, 2022).
Public holidays now mean that the rupee ends FY23 with a decline of Rs81.14 or the highest-ever depreciation of 28%.
Note that the rupee’s depreciation figure and US dollar’s appreciation against the rupee are two different figures.
Experts said the depreciation was primarily driven by challenges posed by debt repayments resulting in the depletion of reserves as well as a significant decline in capital inflows.
“During the fiscal year, Pakistan’s biggest challenge was external debt repayment,” Tahir Abbas, Head of Research at Arif Habib Limited (AHL), told Business Recorder.
The expert said that in July last year, the authorities were able to get the seventh and eighth reviews approved by the International Monetary Fund (IMF). “However, since then, the ninth review remains pending leading to a delay in financing,” he said.
The delay in resumption of the IMF bailout programme has emerged as the biggest obstacle in the way of Pakistan’s economic recovery.
Experts have reiterated on several occasions that the resumption of the Washington-based lender deal is critical.
“If the IMF programme is revived, this would open financing avenues from multilateral and bilateral partners,” said Tahir. “However, we would soon need another major IMF programme,” he said.
The expert was of the view that Pakistan’s basic issue is the shortage of US dollars i.e. liquidity, which has kept the local currency under pressure.
“Monetary tightening in international markets also restricted Pakistan’s access to the capital market,” he said.
If the IMF comes on board, this would improve the supply of greenback, he said.
“However, no major appreciation in the currency is expected even if the programme is resumed, but it would ease off a bit of pressure though,” he added.
Similar views were echoed by Abdullah Farhan, Head of Research at IGI Securities Limited.
The analyst told Business Recorder that Pakistan’s default risk remained high throughout the fiscal year, on account of high external debt repayments.
“This lead to depreciation of the local currency,” he said.
“The difference between the open- and inter-bank markets also increased during the fiscal due to rising default risk. This translated into a shortfall of remittances, as inflows diverted to informal channels.
“However, the differential has reduced since then and remittances are expected to improve,” said Farhan.
The analyst opined that the IMF programme resumption would bring “short-term stability and a bit of correction in rupee”.
“However, the outlook would be determined by funding from other multilateral and bilateral partners, and how would they shape up reserves. This could bring a more sustainable change for the rupee.”
In calendar year 2022, the rupee saw wild swings, only to end its worst 12-month period since the 2008 global financial meltdown with a massive depreciation of 22%.
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