KARACHI: Fears of a higher demand for dollars in the coming months has already pushed its purchase as it has appreciated by seven per cent against the local currency since May this year.

The dollar traded at Rs162.43, an appreciation of 54 paisa, on Friday, showing an appreciation of 7pc against the local currency. In May the dollar traded at a rate as low as Rs152.28.

In terms of the rupee, the dollar has appreciated by Rs10.15 since May which shows the exchange rate is not managed by the State Bank of Pakistan (SBP) but it also shows the exchange rate is not stable.

Fears greenback’s demand will increase in coming months cited as reason for rise

Currency experts said the end of previous fiscal year with current account deficit was a serious blow to the exchange rate while the fear of higher demand of dollars further exacerbated with the information of the SBP that the county would need $20 billion to repay loans.

“The import bill of $6bn in June this year was enough to signal the market that demand of dollar was very high but the State Bank’s information that the current account deficit would be two to three per cent in FY22 forced the importers to book as much as possible to avoid more appreciation of greenback,” said Atif Ahmed, an expert and currency dealer in the interbank market.

Recently SBP Governor Dr Reza Baqir informed the media while announcing the monetary policy that Pakistan’s external financing needs of around $20bn were expected to be more than fully met in FY22.

He said the market-based flexible exchange rate system, resilience in remittances and other factors would help contain the current account deficit in a sustainable range of 2-3pc of GDP in FY22.

“This information is enough to understand the future of exchange rate and the demand and price relation of US dollar with rupee,” said the Mr Atif.

The State Bank says Pakistan’s external position was at its strongest in 10 years with 0.6pc current account deficit in FY21.

However, currency experts also identified some other factors helping the greenback to get more weight against local currency.

“The rising instability in Afghanistan has stirred fear within Pakistan that may hurt the normal economic life in the country. It motivates many people to buy dollars. At the same time, exports to Afghanistan have come down to almost zero level. Formal and informal exports to the country are in the range of $1.5bn to $2bn per year,” said Zafar Paracha, holding one of the largest currencies business across the country.

“The fourth wave of Covid-19 is another negative force to depreciate the local currency and shatter the confidence in it. Covid-19 may destabilise the economic growth and ultimately negatively impact the exchange rate,” said Mr Paracha, former secretary general of the Exchange Companies Association of Pakistan.

The dollar traded in the open market at Rs163.50 but the turnout was low as demand in open market is still low.

Published in Dawn, July 31st, 2021