KARACHI: An appreciating US dollar and a widening exchange rate gap between legal and illegal channels may again hurt the inflow of export proceeds and remittances this fiscal year, currency experts said, fearing that some exporters and overseas workers might prefer to use illegal channels for money transfer.

The recent inflows from multiple sources, which helped double the State Bank of Pakistan’s (SBP) foreign exchange reserves earlier this month, haven’t bent the exchange rate in the rupee’s favour on both interbank and open markets.

A similar trend in the previous fiscal year led to a squeeze in both remittances and exports. The remittances shrank by $4.3 billion to $27bn during the year, whereas exports dropped by $4.6bn to $27.9bn.

This was a significant loss for the country, which could hardly arrange $4.2bn from the International Monetary Fund (IMF), Saudi Arabia and the United Arab Emirates collectively, and that too after the end of fiscal 2023.

“The fear is natural since the country could not strengthen its base to improve the rupee’s value,” said Atif Ahmed, a currency dealer in the interbank market. “Neither the economy is on the right path nor are inflows guaranteed.”

In the previous fiscal year, the government succeeded in bringing down the current account deficit to $2.5bn from $17.5bn a year ago, but the achievement came at the cost of economic growth, which fell to just 0.29 per cent from over 6pc a year earlier.

The government managed to cut the import bill in 2022-23 by restricting imports, but a new short-term loan agreement agreed with the IMF compelled it to open imports. Experts said it would surely increase imports and widen the trade deficit, ultimately increasing the current account deficit.

“Pressure on the rupee will remain there during the entire fiscal 2024, which could divert remittances inflows towards illegal channels as we witnessed in 2022-23,” said a currency dealer, who asked not to be named.

Several analysts and currency dealers expressed fear that any negative comments could invite extra pressure from the regulators or the officials managing the affairs.

Experts also believe that some exporters used illegal channels to bring back a part of the proceeds to get more rupees. They say a difference of Rs15 to Rs20 per dollar still exists between the legal and illegal channels.

During the last couple of weeks, the dollar appreciated by Rs12, though it lost about Rs2 in the last two sessions.

“The rupee is far from a strong currency,” a senior banker said. “Only a stable government and a competent economic team could bring a change, but still two to three years would be required to make the local currency strong enough to absorb day-to-day fluctuations.”

Published in Dawn, July 29th, 2023