The abrupt revaluation of the Pakistani rupee has raised several questions. At what level will the exchange rate eventually settle? At what point must the government or the central bank intervene to stop it from appreciating further to forestall a fresh turmoil in the economy? Will rising currency value disrupt growth? And last but not least how sustainable is the trend?

“Before you answer these questions, you should know what has caused the rupee to move up at such breakneck speed? Without that information, it’ll be difficult to make sense of what is going on,” well-known economist Dr Hafeez Pasha, who was state minister in the second Nawaz Sharif government, told Dawn.

The economist was obviously referring to reports of Pakistan receiving $1.5bn contributed to the recently formed Pakistan Development Fund (PDF) by two ‘friendly Gulf states’.

“Unless we know whether the money has been disbursed as a grant or a loan and on what terms and cost, how can we forecast?”

Where the PDF remains shrouded in mystery, it creates plenty of room for speculation. It creates room for those who attribute the revaluation of the rupee to heavy, panic-selling of dollars, mainly by exporters and ‘investors’. There are others who insist the ‘unexpected’ inflows through the PDF are the main, if not the only, trigger. The market is abuzz with rumours of Saudi Arabia and Kuwait, finally, stepping in to help the Nawaz Sharif government prop up the economy.

“If the report is correct, it means the ‘Nawaz dividend’ has paid off. But this must have come with a high price tag,” Dr Pasha argued.

The high price tag could have been a shift in Islamabad’s Syria and Iran policy and, probably, the government’s stance on the treason trial of retired general Pervez Musharraf.

The rupee has gained well above six per cent against the greenback, strengthening to 98.2 a dollar in the inter-bank market on Wednesday from 104.9 on March 1, and no one is sure where it will stop.

Apart from the PDF dollars, many other factors have contributed to easing pressure on the SBP reserves that grew to $3.9bn at the end of the last month and thus to the reversal in the rupee’s slide. Major debt payments due this fiscal have already been made. Oil imports are being paid through commercial loans rather than through dollar purchases from the market. Remittances and exports are up. The import bill is shrinking. The next IMF loan tranche is expected by the end of this month. Washington is likely to release CSF arrears over the next several weeks. The World Bank and the Asian Development Bank will shortly start releasing funds. The government is planning to sell mobile spectrums and float Eurobonds.

“These factors have driven the sentiment, flushing the Forex market with liquidity. But the unexpected PDF money has done the real trick,” said a banker on the condition of anonymity. Indeed, improvements in such economic indicators as fiscal deficit, inflation, tax collection and industrial productivity have enhanced the feel-good effect about the economy and, as Finance Minister Ishaq Dar said on Wednesday, increased public confidence in the economy and the currency.

However, analysts and bankers agree that the rupee will not sustain the gains going forward if the expected inflows are disrupted. “We must not ignore the reality that most of the expected inflows are debt-based. Not only is it crucial for the government to ensure realization of these inflows before the end of the fiscal but also to create an environment to maintain the growth momentum and attract domestic and foreign investment to increase productivity to keep domestic prices down and boost exports,” the banker said.

Some analysts don’t think that the rupee will fall soon. “We cannot say the recent currency gains will be short-lived or are unsustainable. Although the sustainability depends on the realization of more inflows over the next few months, the devaluation will not be as sharp as we saw in the early months of this fiscal. If it does happen, it will be slow and gradual,” argues Saad Khan, an analyst at the Arif Habib Securities.

Mr Dar says the rupee appreciation indicates the revival of public and investor confidence in the economy and the local currency. Saad largely agrees. “We have seen that businesspeople have more confidence in this government. Businesses are flourishing and profitability has increased. I believe the market has incorporated these (positive) sentiments and it is reflected in the rise of the rupee.”

The rupee revaluation is said to be beneficial to the economy in many ways. It will reduce the (external) debt burden of the government, cut the costs of imports — especially oil — bring down domestic prices and woo foreign investors as the lower price of the greenback will help them repatriate more dollars than they could a few days ago. Still, they say, there should be ‘a limit’ to the revaluation of the currency.“With the rupee hovering around the 98 level, it is time for Mr Dar to depreciate it, gradually, to a level where it does not hurt economic growth,” the banker said. “I believe that the exchange rate has entered the area where its further appreciation could be disruptive for the economy. It has already started to hit the competitiveness of our exporters who are enraged over their losses. The flow of remittances may also slow down.”Indeed, the rising rupee has created new expectations. “The revaluation of the rupee is a good development. But the government should now take a few measures to maintain export competitiveness because we cannot export inflation,” Gohar Ejaz, an All Pakistan Textile Mills Association leader, said. What could be those measures? “Cut the credit cost and energy prices for the industry to the level of the importing countries.”