KARACHI: The rupee on Wednesday plunged against the US dollar following a rating downgrade and the addition of new conditions by the IMF for the revival of the loan programme.

State Bank of Pakistan (SBP) reported the rupee depreciated by 1.7 per cent or Rs4.61 to Rs266.11 against greenbanck from Rs261.50 a day earlier.

The currency market was in shock after this sudden surge in dollar value as it thought the recovery from Rs276.58 on Feb 3 to Rs259.92 on Feb 27 was a reflection of an exchange rate stability but the rupee failed to put up any strong resistance.

“The rating downgrade by Moody’s played a key role to weaken the local currency,” said Anwar Jamal, a currency dealer.

However, the bankers said the inflows of remittances from overseas Pakistanis were intact with slight fluctuations but the sudden depreciation of the rupee has more than one reason.

“The Moody’s downgrading was surely another blow to the economy and exchange rate but the report about the new differences in talks with IMF inflicted the market deeply,” said Atif Ahemd, a currency expert in the interbank market.

Media reports suggest the IMF has included several new conditions to make the talks result-oriented. Pakistan largely depends on IMF to unlock the inflows badly needed to avoid sovereign default. In the absence of dollar inflows, the SBP has placed restrictions on opening letters of credit for imports.

However, importers have turned to the grey market to buy dollars even at much higher prices than the banking and open markets.

“This illegal market is one of the strong reasons for the dollar price hike. They offer Rs30 to Rs40 per dollar higher than the prevailing prices means there is always room for rupee depreciation,” said Amir Aziz, an exporter of textile finished products.

Neither the government nor State Bank can afford to allow imports due to an extremely low level of foreign exchange reserves, barely around $3.2bn.

However, the central bank has allowed importers to arrange dollars on their own which thrived the grey market from Karachi to Kabul.

Market sources said the dollar’s appreciation may continue since the inflows are slow and talks with IMF are yet to bear any fruits.

Since the change of government in April 2022, three top international rating agencies have downgraded Pakistan eight times, a rare move that not only damaged the country’s image abroad but also reflects the poor health of the economy.

During the last three sessions the greenback appreciated by 2.3pc or Rs6.19 painting a bleak picture for the stakeholders who were hoping to see the rupee recovery particularly after ending artificial caps on the exchange rate.

Bankers said that importers are unable to buy dollars from markets while the open market supplies dollar in very small quantities, not enough for even a small consignment.

Published in Dawn, March 2nd, 2023