KARACHI: The government does not like to see further devaluation of dollar against the rupee as it impacts both imports and exports, said currency dealers and experts in the interbank market.
The dollar fell to a five-month low against the rupee, causing serious concerns for exporters. At the same time, the government fears that a cheaper dollar could lead to higher imports, which may disturb the current equilibrium between imports and exports.
“The inflows are not very high, but the State Bank of Pakistan assures [there is] no excess dollar liquidity in the banking market. The higher dollar demand means no dollar devaluation, and the PKR remains cheaper for exporters,” said Atif Ahmed, a currency dealer in the banking market.
The dollar fell to a five-month low against the rupee, reaching Rs278.77 on Friday, triggering fear among exporters. Exporters have a strong lobby in the power corridor, but their demand for cheaper energy was rejected by the IMF.
Further devaluation of greenback could disrupt import-export balance
The caretaker government had a proposal to provide electricity to exporters at the rate of nine cents per unit, down from the current rate of 14 cents per unit, but the IMF rejected the proposal. Governments in Pakistan are bound to follow IMF guidelines as they need financial support for running the economy.
“We are already under pressure due to a very high interest rate of 22 per cent, making the cost of doing business the highest in the region,” said Amir Aziz, an exporter of textile finished products. He highlighted record-high electricity, gas, and petroleum prices,
along with the persistent 22pc policy interest rate, which have rendered exporters unable to compete in international markets.
“The impact of the high cost of production would be significant and will be felt in the next 12 months as we have been fulfilling previous orders,” he said.
The newly appointed finance minister, Muhammad Aurangzeb, recently hinted at a gradual cut in the interest rate. The high interest rate has badly impacted economic growth, and another poor performance is expected in FY24, with a growth rate of hardly 2pc.
The central bank is scheduled to announce its monetary policy on Monday. The financial market is full of speculation about the interest rate, but a number of experts said it depends on March inflation, which may rise due to Ramazan food price hikes.
Mr Atif said the cheaper dollar could push up imports and ultimately it will increase the twin deficits, trade and current account deficit. The country succeeded in slashing the trade deficit, while the current account deficit in the seven months was about $1 billion. This is a significant achievement for a country that has to pay up to $24bn in debt servicing in FY24.
Though the stable exchange rate has failed to attract foreign investments, it provided confidence to the stakeholders of the economy and supported exporters in selling their export proceeds. The selling of export proceeds generated dollar liquidity in the banking market and helped the market remain stable.
Published in Dawn, March 17th, 2024
