KARACHI: Mounting pressure on the rupee has slashed its value by 3.2 per cent against the US dollar alone in March, leaving little doubt that the falling forex reserves of the State Bank of Pakistan (SBP) and deepening political crisis could further devalue the local currency in coming days.

During the week that ended on April 1, dollar was traded at Rs184.09, a rise of Rs2.34 or 1.2pc. During the month of March, the dollar gained Rs6.62 or 3.2pc against the rupee.

“Demand pressure along with other factors is devaluing the local currency against the dollar with each passing day,” said Atif Ahmed, a currency dealer in the inter-bank market.

Rupee devaluation against the dollar without any interruption has convinced market players the greenback will appreciate next day again, he said. “How long can the SBP intervene in this situation which is getting out of control,” he asked.

Bankers say central bank not in a position to pump dollars

Currency experts said the SBP was also under pressure as its reserves have been declining in the last eight months of the current fiscal year (8MFY22). Experts feel that the central bank has lost confidence in getting control over the exchange rate after losing about $8 billion in 8MFY22. The dollar has appreciated by over 16pc since August.

“Look at the import bill which has gone up by 49pc during July-Feb FY22 and rose to $47.9bn during this period compared to $32.1bn in same period in FY21,” said Faisal Mumsa, a currency analyst and trader.

He was not sure where the dollar would stop for the stability of the exchange rate.

Meanwhile, bankers said the SBP has been trying to intervene in the market, but is not in a position to pump dollars to bring even temporary stability in the exchange rate.

The SBP has witnessed an outflow of $2.9bn from its reserves on March 31 which fell to slightly over $12bn. The prices shot up in the market with the shocking outflow. The central bank said most of the amount were used to pay back China and for other debt servicing. The foreign minister of China assured Pakistan that it would reroll the entire $2.4bn, while the SBP maintains the amount would return to its reserves soon.

Rupee devaluation has led to a sharp increase in the prices of locally manufactured products and inflated the economy. Local products are in completion with the imported ones while the imported raw material has pushed the cost of production.

“The $47.9bn import bill has raised production cost in the country making us unable to produce competitive products,” said Aamir Aziz, a finished textile products manufacturer and exporter.

He said commodity prices are high in the global market, which has help manufacturers sell their products. “However, this will not last for much longer.”

Market sources said the ongoing political crisis has damaged the market sentiments and created uncertainty about the future government policies. Sensitive markets like currency and equity suffer first before the entire economy reflects the impact, they added.

Due to the ongoing political turmoil in Islamabad, foreign investments in domestic bonds were quickly withdrawn. About $387 investment in Pakistan Investment Bonds and treasury bills left Pakistan in March alone.

Pakistan borrowed heavily from China during the last three years to meet its foreign obligations, while the previous debts of Paris Club and other financial institutions have already burdened the economy. Analysts claim that Pakistan needs about $35bn to for debt servicing and other foreign obligations during FY22.

Published in Dawn, April 3rd, 2022