Interestingly amid worsening current account deficit, the rupee seems to be holding its ground against all major trading partners and export competitors.

Against the dollar, the rupee is flat on CY16TD and FY17TD basis. As exporters are finding it hard to compete with regional countries, no substantial break through is expected on this front as well, while Coalition Support Fund receipts are also set to slowdown from FY17.

As oil prices gradually rise, the oil import bill will witness a similar increase while machinery imports under CPEC are also set to augment going forward. Though the CPEC inflow will be witnessed in the financial account, a similar quantum of imports will largely neutralise the forex reserve addition impact.

A more interesting analysis is looking at the movement of the rupee in the last three years, which again shows that the rupee has appreciated against all relevant currencies (4pc Bangladeshi takka, 14pc Chinese yuan, 24pc euro, 25pc pound, 11pc Indian rupee, 12pc Japanese yen, 14pc Thai bhat and 2.5pc dollar).

While the government has set lofty targets for the financial account as well, further bilateral loans may also slow down if the government slows down the pace of structural reform given the populist stance historically seen going in to the election year (due in 2018).

The structural issue of an overvalued currency (REER of 121.8 versus dollar) remains, which continues to stimulate higher imports and keep exports at a disadvantage.

— Courtesy Alfalah Securities

Published in Dawn, Business & Finance weekly, November 28th, 2016