After hitting an all-time low of 239.71 to a US dollar on September 22, the Pak rupee has since made a handsome gain of 8.25 per cent. It closed at 219.92 per dollar on October 7.

Whether Finance Minister Ishaq Dar can bring the exchange rate to Rs200 per US dollar, as he has repeatedly claimed, broadly depends on two things: how the US dollar fares against major foreign currencies and how quickly our external sector indicators improve. The US dollar looks set to remain strong and may even get stronger vis-a-vis the world’s major currencies.

There is hope for improvement in the external economy. But it is too optimistic to expect that enough progress will occur within this fiscal year. So, we should not hope for a “sustainable and huge” appreciation in the rupee’s current value during this quarter or in the next two quarters of this fiscal year.

The rupee that has already made sizable gains in the past two weeks ending on October 7 may still make more yet limited recovery. But we should not discount the possibility of the local currency’s occasional downward slides within this quarter — and afterwards.

The recent exchange rate appreciation is not purely based on positive sentiments ignited by the return of Mr Ishaq Dar — the declining dollar index from September 28 onwards has contributed to it as well

The US dollar index, a measure of the greenback’s health in a basket of the world’s six major currencies, has been retreating from its 27th September peak. But that does not mean the rising trend of the US dollar has reversed or come to a halt. That only betrays the effect of the unusual interest rate tightening by the Central Bank of Europe, the Bank of England and rare forex market interventions undertaken by the UK and Japan as the “reverse currency war” continues to rage.

In this “war” initiated by the US Federal Reserve, central banks of all major economies are trying to prop up their own currencies. They can be expected to continue doing so as the Fed has indicated it will keep raising interest rates to stem decades-high inflation in the US.

What does all this mean for the rupee-dollar exchange rate? It means that as all key global currencies, including the USD, Euro, Japanese Yen and Chinese Yuan, keep marching forward — at different paces — the rupee’s relative strength against them, most notably against the reference currency of USD, will continue to fall.

The recent rupee’s recovery is not purely based on positive sentiments ignited by the return of Mr Ishaq Dar once again as finance minister. The temporary retreat in the US dollar index from September 28 onwards also has contributed to it. The rupee had hit an all-time low of 239.71 to the greenback on September 22 when the US dollar index was still busy scaling new peaks. Later, the rupee’s recovery started, backed by the “Dar factor” and the declining dollar index.

Eventually, the underlying strength of our external sector will — and should — weigh on the health of the local currency

Ishaq Dar claims that he knows how to manage exchange rates amidst the forex shortage in the country. What apparently lends credence to his claim is that during his previous stint as finance minister (between FY14 and FY17), the rupee remained stable. At the end of June 2014, the rupee had closed the inter-bank trading session at 98.78. It slipped to 102.15 at the end of June 2015, then to 104.54 at the end of June 2016 and finally to 104.65 at the end of June 2017.

But this “capping” of the exchange rate between FY14 and FY17 led to a steeper depreciation of the rupee in FY18. Between July 2017 and June 2018, the rupee lost 16.3pc of its value against the greenback and closed at 121.73 per dollar at the end of June in the interbank market.

Dar’s insistence on keeping the rupee artificially strong against the advice of the then leadership of the State Bank of Pakistan (SBP) is an open secret. What else is open to all is the level of the current account deficits and other relevant external account data of FY14-FY17.

A careful reading of the balance of payments statements for those four years makes it clear that the rupee was kept artificially stable. For example, during FY17, we had a large current account deficit of about $12.1 billion, yet the rupee remained quite stable — and lost just 10 paisa to a US dollar on yearly basis!

But that is history. Times have changed now.

Unlike in the past, the SBP now enjoys a constitutional cover for independent decision-making and remains committed to maintaining a market-driven exchange rate system.

That makes it difficult for Dar to maintain artificial exchange rate stability except for a few weeks. More so because the International Monetary Fund fully backs the SBP’s independent decision-making, and forex markets in Pakistan have grown mature enough to punish any manipulative moves aimed at artificially stabilising the exchange rates.

What has thus far supported the rupee’s appreciation is that “speculative moves” of some unscrupulous forex market players were also responsible for sending the rupee down to a new all-time low of 239.71 on September 22. That is where Finance Minister Ishaq Dar is accurate in his assessment of the exchange rates.

His warning to currency speculators and the joint probe launched by the Ministry of Finance and SBP against some banks that allegedly erred in disciplined forex trading have apparently produced results.

The government and the SBP are duty bound to investigate the behaviours of banks and forex companies to ensure that the exchange rates regime remains truly market driven. One hopes that the ongoing investigation against more than half a dozen banks would yield positive results for enhanced vigilance of forex markets.

But eventually, the underlying strength of our external sector will — and it should — weigh on the health of the local currency.

Published in Dawn, The Business and Finance Weekly, October 11th, 2022