The rupee has gained around 18 paisas each day since hitting a trough of Rs168.43 on August 26 against the dollar. The rupee on Nov 13 hit a six-month high of Rs158.33 against the greenback. Between these months, markets have reacted to the first quarterly surplus in more than five years, $2 billion in remittances for five consecutive months, extension in debt suspension initiative by the G20 countries, low oil prices and reportedly significant dollar inflows under the Roshan Digital Accounts.

The real effective exchange rate for September at 94.119 further proves the appreciation was warranted as the rupee had been undervalued for quite some time now.

Beyond rupee, other emerging, as well as frontier markets, have appreciated since the US election. Over the last 12 months, the US Dollar Spot Index is down 5 per cent. “A broad basket of the larger emerging market currencies is up about 3pc since the US election. Currencies in frontier countries like Pakistan have been helped by this, particularly as it follows on from a period of growth in remittances and low oil prices,” says Tellimer’s Managing Director Emerging & Frontier Markets Equity Strategy Hasnain Malik.

‘A broad basket of the larger emerging market currencies is up about 3pc since the US election. Currencies in frontier countries like Pakistan have been helped by this, particularly as it follows on from a period of growth in remittances and low oil prices’

So far, it is safe to say that over the last few months, the exchange rate is being driven by the supply-side dynamics with higher inflows allowing the local currency to appreciate. But many are questioning whether the rupee will hold its ground in the coming months.

Keeping in view the budgetary estimates for external debt servicing of $10.363bn in the ongoing fiscal year, many wonder if the rupee’s appreciation could be undone as dollar outflows pick up in the second half of the current fiscal year. As per the government’s own projections, of the $10.36bn in external debt servicing due in the current fiscal year, it has so far in July-August paid off just $798 million with $9.569bn due in the coming months.

However, if the country books another surplus during November thus increasing the total to $1bn, it would have an adequate cushion for support to pay imminent liabilities which would further delay the pressure on the rupee.

In addition, the government is already reviewing bids from banks to raise $1-1.5bn from Eurobonds which could serve as a replacement for the projected outflows by December. Moreover, reports claim that the government has already made alternate arrangements to cover up some expected outflows over the next few months.

Another factor at play here is the government’s push to increase exports which have only risen marginally over the last few months. The commerce ministry is eyeing to increase exports to $37bn and a stronger rupee hurts exporters. But exports might be insulated from the strengthening rupee in the short- to medium-term as exports in the current fiscal year are already averaging at $1.89bn per month compared to $1.92bn per month in the last two fiscal years. This shows that the country’s export capacity is already at operating its maximum.

With the government looking to increase foreign exchange reserves through market flows and the State Bank of Pakistan refraining from exchange rate interventions, the country’s reserves are also likely to rise. The country’s total foreign exchange reserves have increased to $19.9bn by Nov 3 from $17.9bn at the start of the current fiscal year. Reserves have increased on inflows under the International Monetary Fund’s (IMF) $1.4bn under the Rapid Financing Instrument (RFI) due to Covid-19 and early disbursements of some programme and project loans by the World Bank, Asian Development Bank and Asian Infrastructure Investment Bank. On the other hand, debt relief from G-20 countries as part of support to poor nations has also eased outflows.

But experts warn that the remittance flows are likely to lose steam and with global demand increasing, the oil prices will also rise in the next few months. “The next key events for the rupee are central bank interest rate changes and, more importantly, the review of the International Monetary Fund programme. Remittance growth cannot be relied upon to continue and oil prices have ticked up,” says Tellimer’s Hasnain Malik.

As per the latest reports, the IMF programme has hit a snag as the government is struggling to deal with the timings of the structural benchmarks on issues like the power sector reforms and revenue collection. However, the government is in consultations with the IMF on a daily basis on structural benchmarks and their timings.

Going forward, the real test will be how the IMF reacts to the recent

bout of appreciation once Pakistan is back in the programme. “Will they make a currency depreciation a precondition for the resumption of the programme? I think they might,” thinks KASB Securities Chairman Ali Farid Khawaja.

Published in Dawn, The Business and Finance Weekly, November 16th, 2020