Defying market expectations of currency stability following receipt of $3 billion in aid from Saudi Arabia, the rupee continued to lose ground against foreign currencies as it hit a new all-time low of Rs177.43 against the US dollar in the inter-bank market on Wednesday.

The rupee had closed at Rs176.79 on Tuesday, showing day-on-day drop of 0.36% (or Rs0.64) on Wednesday, according to the State Bank of Pakistan (SBP).

The receipt of $3 billion from Saudi Arabia on Saturday last week for depositing in the State Bank had been expected to support the rupee’s recovery and stabilise it at around 175.

In the open market, the local currency dropped to Rs179 per dollar, according to the Exchange Companies Association of Pakistan (ECAP).

Pakistan’s current account deficit is expected to widen by $2 billion to $2.5 billion in November in the wake of a surprising spike in the import bill to a record high at $8 billion.

“The anticipated current account number is unsustainable. This is taking a toll on the rupee,” Arif Habib Limited (AHL) Head of Research Tahir Abbas said while talking to The Express Tribune.

ECAP President Malik Bostan was of the view that financial crisis in neighbouring Afghanistan was accelerating the drop in rupee’s value against the dollar.

Prices of commodities in Afghanistan are significantly higher compared to Pakistan. Similarly, one US dollar in the neighbouring country is available for 10 rupees more than in Pakistan.

“This situation has encouraged the smuggling of goods and currency along the Pakistan-Afghanistan border,” he said and noted that the smuggling of goods to the neighbouring country was leading to a spike in Pakistan’s import bill.

Pakistani currency has depreciated 16.52% (or Rs25.16) in the past six months compared to the 22-month high of Rs152.27 recorded in May 2021.

Since the start of current fiscal year on July 1, 2021, the rupee has dropped 12.62% (or Rs19.89) compared to the opening level of Rs157.54.

Bostan revealed that the price of wheat flour in Afghanistan was more than double than in Pakistan, which encouraged smugglers to send flour shipments to Kabul, resulting in an increase in imports of food items into Pakistan.

The Taliban government in Afghanistan is in dire need of dollars to run the country. However, the US has denied access to Kabul’s foreign currency reserves of around $10 billion which are parked in US banks.

He said that the inflow of workers’ remittances dropped to $2.5 billion in October 2021 compared to around $2.7 billion in prior months.

“The drop in remittances came as Hawala/Hundi operators were operating in border areas,” he said. The drop in workers’ remittances also aided the depreciation of the rupee, he said.

Bostan said that foreign exchange companies were providing $300-400 per month to the inter-bank market due to excess supply on their end however, this amount dropped to around $200 million in the ongoing month. He pointed out that hawala-hundi operators were offering a better price therefore there was a drop in inflow of remittances through the official channels.

He said that the Exchange Companies Association of Pakistan had explained the situation to high ranking officials of the country including Finance Adviser Shaukat Tarin, Commerce Adviser Razak Dawood and State Bank of Pakistan Governor Reza Baqir. According to him, they promised to check the smuggling and take appropriate actions against it.

Abbas said the recent drop in international oil price would help taper off Pakistan’s import bill. Besides, the forthcoming mini-budget is expected to introduce measures to cut the import bill through he imposition of regulatory duty and increase in customs duty.

The mini-budget is expected to be unveiled sometime in the ongoing month of December and the measures, included in it, would support the stabilisation of rupee.

According to him, there was available no room for lofty depreciation in rupee. The domestic currency should stabilise at around Rs175-176, he said.

Published in The Express Tribune, December 9th, 2021.

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