KARACHI: Political unrest wreaked havoc on the currency market for the second consecutive day as the rupee dropped 3.06 per cent on Tuesday to an all-time low of 221.99 in interbank trading.

The national currency traded as high as 224 against the dollar on the open market.

The State Bank of Pakistan (SBP) attributed the 11-rupee change in the exchange rate in just two days to the “market-determined exchange rate system” under which the current account position, news stories and domestic uncertainty contribute to the daily currency fluctuations.

In an apparent attempt to downplay the depreciation, the SBP said a “better measure” of the rupee’s strength is the real effective exchange rate, which takes into account the currencies in which Pakistan trades in inflation-adjusted terms.

The central bank said the depreciation in the rupee “since December 2021 has only been 3pc”. In nominal terms, however, the local currency has depreciated against the dollar by 18pc over the same period.

The US Federal Reserve has increased interest rates in the recent past to combat inflation, which is hovering at a 40-year high. As a result, international funds are flowing into the US economy to earn better returns. This has led to an increase in demand for dollars, propelling the greenback to a 20-year high against a basket of peers.

“There’s a strong perception in the currency market that any abrupt change in the existing political setup may put the International Monetary Fund (IMF) loan programme in jeopardy,” said Syed Atif Zafar, CEO of Uraan Ltd, an economic research house.

Any change in government at the federal level can possibly delay the IMF disbursement, which will also put at risk the expected flows from “friendly countries” as well as the World Bank, Asian Development Bank and other multilateral institutions, he added.

The government expects inflows of as much as $4bn from these unnamed friendly countries to help bridge its financing gap in 2022-23. The country’s gross financing requirements for the current fiscal year are north of $33bn.

Exchange Companies Association of Pakistan General Secretary Zafar Paracha said the sharp fluctuation appears to be a result of some “IMF condition” that the government seems to have agreed to.

“If the exchange rate was deteriorating because of poor economic numbers alone, its movement wouldn’t be zigzagged,” he said.

The rupee appreciated to 204.56 in the first week of July after touching 211.93 on June 22. It kept losing its value against the dollar but registered a minor appreciation when the country reached its staff-level agreement with the IMF on July 15.

“It’s the national currency, not the stock price of a small-time company that goes up and down on alternate days,” said Mr Paracha.

The rupee depreciates every year as the dollar outflow on account of import payments always outpaces the inward movement of the US currency in the shape of export proceeds and remittances etc. In 2021-22, the country recorded its highest-ever trade deficit, or the gap between dollar payments and receipts. It widened 55.7pc year-on-year to $48.4bn in the last fiscal year, according to the latest data issued by the Pakistan Bureau of Statistics.

In a statement released on Tuesday, Federation of Pakistan Chambers of Commerce and Industry’s acting president Suleman Chawla said the volatility in the rupee-dollar parity has pushed “many factories” to the brink of closure. “This should be treated as an economic emergency from all stakeholders,” he said.

Published in Dawn, July 20th, 2022