• PKR set to become ‘best-performing currency’ this month after over 6pc gain
• Analysts call for higher inflows to stabilise exchange rate; link long-term outlook to economic fundamentals, IMF review

KARACHI: Despite the rupee’s dramatic rise this month, market analysts rem­ain sceptical about its long-term performance, under­scoring the need for substantial inflows in the upcoming months to maintain the favourable exchange rate.

The rupee has gained 6.1 per cent against the dollar so far in September, following an official clampdown on illegal foreign exchange trade in grey and black markets by security agencies. September’s gains have almost made up for all of the rupee’s losses in August.

Bloomberg and Reuters reported that the rupee was on track to become the best-performing currency in the world this month.

On Thursday, the rupee closed 0.3pc up in the interbank market at 287.7 per dollar. The rupee hit a record low of 307.1 against the dollar on Sept 5 but has made a sharp recovery since the country’s financial regulator and security agencies began taking action the next day to curb black market operations.

Before the crackdown, the dollar was trading at Rs332 in the open market, and a hefty Rs30 above the interbank rate in the grey market. The US currency has now slumped to Rs288 in the open market.

Samiullah Tariq, the head of research and development at Pak-Kuwait Inves­t­­ment Company, expressed optimism over a strengthening rupee but stressed the need to ensure a consistent inflow in the coming months to solidify the PKR’s position. He noted that while sentiments have positively changed, the rupee remains weak year-on-year.

Topline Securities CEO Mohammed Sohail expec­ted the rupee to strengthen in the short run due to regulatory actions. However, he said that the fate of the currency in the medium run hinged on economic fundamentals, especially the foreign exchange reserves and the outcome of the IMF loan review in November.

The country’s financial landscape saw a transformative shift after the previous government signed a short-term, $3bn loan agreement with the IMF earlier this year, pulling the country back from the brink of sovereign default. Therefore, the upcoming IMF review in November holds significance for the nation.

At present, Pakistan has fulfilled a key IMF condition — narrowing the price differential to less than 1.25pc in the interbank and open currency markets.

‘No speculation’

“There is no speculation and no manipulation behind the current exchange rate,” said Zafar Paracha, general secretary of the Exchange Companies Association of Pakistan.

He identified several positive outcomes of the crackdown on illegal currency trading, currency and commodity smuggling and the closure of the illegal grey market.

“While the rupee is regularly appreciating, the inflows of remittances have remarkably increased,” he said, insisting that the September data would reflect these figures.

Before the crackdown, the dollar supply to banks plummeted to under $5m, Mr Paracha said, adding that this figure has since rebounded, with around $150 million being sold to banks in the past week alone.

“The dollar inflows are so high that we have been selling about $25m per day to banks, which means the total supply to banks would be around $550m in the 22 working days of a month,” he said.

“I believe that the lost $4.2bn remittances in the 2022-23 fiscal year would be recovered this year and the remittances could cross $30bn by the end of this fiscal year,” he said and emphasised the importance of a sustained crackdown.

Need for inflows

Experts agree that the crackdown, which now encompasses sectors from car imports to gold, was long overdue.

“In the medium term, we should focus on bilateral and multilateral inflows, including the IMF,” said Tahir Abbas, head of research at Arif Habib Limited. “Moreover, we should focus on remittances, Foreign Direct Investment (FDI) and manage the inflows in the coming six to nine months.”

Meanwhile, the State Bank of Pakistan has also undertaken numerous initiatives recently, including suspending or cancelling the licences of six exchange companies, introducing industry reforms, encouraging banks to establish exchange companies, and offering incentives to remitters.

Currency experts anticipate that increased bank participation in currency dealings, coupled with exchange companies, might phase out independent exchange firms.

Also on Thursday, the State Bank reported that its foreign exchange reserves fell by $59m during the week ending on Sept 22 to $7.6bn.

Published in Dawn, September 29th, 2023