KARACHI: The rupee made a sharp recovery of 1.13 per cent against the US dollar in the interbank market on Friday as the government increased the petroleum prices by a whopping Rs30 a litre paving the way for the release of a $1 billion tranche from the International Monetary Fund.

However, the currency dealers said the new exchange rate was not sustainable.

Since the new government took charge in the second week of April, the dollar kept moving upward and gained Rs19 till May 26. However, the greenback on Friday traded against the previous trend and lost Rs2.25 in a single session to Rs199.76 from Rs202.01 on Thursday.

In the open market, the dollar was traded at Rs201 against Rs203 a day earlier.

Currency dealers in the banking market said the State Bank of Pakistan (SBP) played a key role in the depreciation of the dollar as it allowed selected banks to sell dollars for limited imports which increased the dollar availability in the market.

Experts believe currency won’t sustain gains in long run

However, bankers also noted that the petroleum price increase is a sign that the government has accepted the IMF’s preconditions for the release of $1bn. The market also reacted positively hoping inflows from the IMF will improve the foreign exchange reserves of the SBP.

The government has calculated Rs54 per litre increase in petroleum prices, which means more hikes are in the pipeline. The removal of subsidies on electricity rates is another precondition to revive the stalled IMF bailout programme.

“I don’t think that the rupee will sustain the gains for any longer period, instead the exchange rate could see dollar appreciation on Monday next,” said Atif Ahmed, a currency dealer in the interbank market.

He said the main reason for rupee depreciation is the declining foreign exchange reserves which have yet not increased.

However, bankers believe that the inflow of $1bn from IMF may open more windows for the inflows of dollars from other sources.

“Pakistan is still awaiting rollover of $2.3bn syndicated Chinese loans it paid back in March. The Chinese foreign minister had promised to roll over these loans it is not even in the pipeline,” said a senior banker, adding that this no-rollover weakened the exchange rate and badly affected the foreign exchange reserves of the country.

Currency experts were also firm that the political uncertainty was a strong reason for the depreciation of the rupee. Since March the political situation started deteriorating and allowed the speculative forces to get the benefit from the fluid situation.

They believe the rupee’s appreciation was the outcome of the retreat of speculative forces.

“It is good to see that dollar depreciated but it is also visible that no strength has been provided for the strength of exchange rate as there aren’t any dollar inflows so far,” said Zafar Paracha, General Secretary, Exchange Companies Association of Pakistan (ECAP).

He said the rollover of the $2.3bn Chinese loans could be more important since the inflows from IMF may take a longer time for approval and disbursement. During this period dollar reserves could further decline which could further weaken the local currency.

Published in Dawn, May 28th, 2022

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