KARACHI: The Pakistani rupee faced a significant drop on Tuesday, the first day of the interim government taking over power in the centre, as it closed at a three-month low of Rs292 against the US dollar. This depreciation comes after the local currency shed Rs3 against the greenback in the interbank market around midday. The drop was in line with market speculation that the domestic currency would experience further depreciation.
Despite having remained stable at around Rs288 against the greenback for the past three months, the speculation of a fresh round of depreciation has been prevalent due to the International Monetary Fund’s (IMF) latest $3 billion loan program acquired in late June 2023.
The previous government under the Pakistan Democratic Movement (PDM) did not carry out the depreciation during the last two months of its rule, potentially to save political capital. Consequently, implementing currency depreciation was left to the caretaker setup.
Rumours and market discussions also indicate that the government’s decision to remove all import restrictions influenced the rupee’s depreciation. These restrictions were previously in place to manage the country’s dwindling foreign exchange reserves.
After the IMF deal and capital inflows from friendly countries, the Pakistani rupee initially experienced a brief surge in value against the US dollar. However, the currency has since weakened again, regressing to pre-deal levels of Rs285 and Rs290 per dollar.
This decline occurred despite the State Bank’s foreign exchange reserves doubling within a month, indicating that these factors alone were insufficient to bolster the rupee. The removal of import restrictions has heightened demand for the dollar, placing pressure on the local currency.
Furthermore, the interbank rate of the rupee is inching closer to the open market rate, suggesting an increasing influence of market forces in determining the rupee’s value. This shift aligns with the IMF’s demands and reflects a currency’s valuation mechanism change.
Simultaneously, global oil prices have surged, with Brent crude, the international benchmark, rising from under $75 a barrel in early May to its current price of $84. Combining robust demand and constrained supplies could elevate oil prices.
Notably, the rupee had hit an all-time low at Rs299/$ in May, driven by high political drama and a deteriorating law and order situation. It later recovered to approximately Rs275/$ in July following the IMF loan program.
As the interim government takes charge and the currency faces fluctuations, it remains to be seen how economic policies and global market dynamics will influence the trajectory of the Pakistani rupee. The interplay between political decisions, external financial support, and market forces will undoubtedly shape the currency’s outlook in the coming months.