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Rupee’s decline

May 27, 2012

SEVERAL internal and external factors have brought the rupee under pressure in recent days. It is not for the first time that the value of the rupee has been subject to sudden fluctuations. Each time foreign debt payments approach, Pakistani currency loses some of its value. In the first 10 months of the current fiscal to April, the rupee lost around eight per cent against the greenback. When the market gets shaky, the rupee touches new lows before stabilising for a short time. This time the approaching commodity and Haj payments put pressure on the market along with debt and other official payments. A shortage of dollars offered speculators a chance to make quick bucks. The concerns over debt payments, however, evaporated as soon as the State Bank of Pakistan announced the receipt of a multilateral loan of $200m, reducing exchange-rate volatility. Additionally, the weakening euro has strengthened the greenback. Investors worldwide are buying dollars, which are being seen as the safest haven in the current global economic conditions. The Indian rupee too has been affected. But it will regain lost ground sooner than later on the back of the economy’s strength.

Pakistan’s story is different. Its outflows of over $4bn in the current fiscal surpass inflows of $1.2bn, including foreign investment of over $600m. Foreign exchange reserves are depleting, though slowly, because of drying foreign investment and official bilateral and multilateral capital flows. The fortunes of the rupee will continue to fluctuate until the economy shows signs of stabilisation and foreign capital flows start coming in to boost foreign currency reserves. Moreover, the government will have to take measures like providing uninterrupted electricity and gas to the export-oriented industry to boost exports, curtail unnecessary imports and move ahead with plans to auction 3G telecom licences to send a positive signal to the currency market.