Dollar Strengthens Against Rupee Amidst Weakening Economic Sentiment
The dollar’s recent resurgence continues, approaching Rs285 in the interbank market after reaching a low point in mid-October. Various factors have contributed to this shift in the rupee’s fortunes. This rise of Rs7.7 or 2.8% in the last ten sessions is attributed to drying up inflows and strong demand from importers.
According to banking experts, a shortage of dollars is the primary cause of this change in sentiment. Additionally, there is a belief that inflows have diminished, and the recent Israeli attacks on Gaza have eroded hopes for foreign investments from the Middle East.
Exporters find the dollar’s appreciation beneficial for their profits, but the imported inflation resulting from the higher value of the dollar may jeopardize growth, particularly in the large-scale manufacturing sector.
Amir Aziz, an exporter of finished textile products, pointed out the challenges in the current economic situation, including import restrictions and high production costs, particularly in the textile sector, the country’s largest exporter.
Despite positive talks with the IMF regarding the release of the second tranche under the $3 billion Stand-By Arrangement, experts see no significant inflow. A senior banker expressed concerns about the recent terrorist activities destabilizing the political and economic environment and creating uncertainty about future economic trends. While the government remains confident about economic stability, the fragility of economic growth is evident.
This increase in the dollar’s value comes just two months after it reached a record high of Rs307.10 on September 5, prompting the government to crack down on illegal currency businesses and smuggling. These efforts brought the dollar down to Rs276.63 on October 16, a decrease of Rs30.47 or 9.9% in 40 days.
The USD/PKR exchange rate typically experiences volatility when the IMF team visits. This time, banks were not allowed to fund their nostros through buy-sell swaps, resulting in forward premiums rising and importers paying a wider spread for their payments due to a scarcity of dollar liquidity.
Faisal Mamsa, CEO of Tresmark, highlighted the recent challenges faced by the rupee, with export proceeds slowing down due to adjustments against earlier export forwards. The currency market crackdown has had a significant impact.
Forward premiums for one, two, and three months have increased substantially, reaching 200, 300, and 600 paise. Faisal Mamsa predicts that the dollar is likely to stabilize at around Rs285 in the coming week, occasionally spiking to Rs288, with expectations of a recovery once the IMF provides a favorable assessment for Pakistan.