Weakening rupee raises fears for economy – Business

KARACHI: As the rupee continues to weaken faster than the market expects, doubts and fears are mounting about the country’s economic health, particularly its ability to pay the import bill for essential items in the coming weeks.

The exchange rate has been particularly hard hit by a sharp decline in central bank foreign exchange reserves, which have shrunk to a low of $4.34 billion nearly nine years ago.

The stock market, bested by political uncertainty and worrying economic indicators, is also falling, falling 3.5 percent on Tuesday to close at 38,342.21.

Currency experts said the rupee has fallen “despite being managed by the State Bank of Pakistan (SBP)”. On Tuesday, it closed at Rs 228.66 against the dollar.

The local currency last appreciated against the dollar on Dec. 1, when it rose 0.12 percent to close at 223.69. The decline has gained momentum in recent days, with the rupee falling by 1.25 in the last six sessions.

Amid a dollar shortage, the gap between interbank and open market rates has widened significantly, dramatically hurting the economy and diverting remittances from the legal bank channel to the gray market.

“A sharp drop in foreign exchange reserves has led to irreparable losses to the economy and damaged business confidence,” said a senior banker.

Bankers believe that the country will soon notice the shortage of petroleum products along with essential commodities such as food products.

“There has been no significant inflow since June when China provided $2.5 billion. We are monitoring outflows despite low imports and inflows of remittances averaging $2 billion per month,” said Atif Ahmed, a currency expert on the interbank market.

SBP reserves of $4.34 billion were alarming for the country, he said.

The Treasury Department has assured exporters that imports will be allowed for inputs, but the currency experts were still looking for improvement. “We need immediate help to save the country from default and the people from a situation like Sri Lanka,” said a currency dealer.

Exporters, however, welcomed the decision but said it was too late as they had lost a significant share of the international market, particularly in textiles, where Bangladesh had increased its lead over the past six months.

“We have received some orders from abroad, but we have already closed several factories due to shortage of orders and unavailability of gas,” said Shakil Kakvi, a director of a local textile production and export unit. However, he said not all exporters were getting orders.

Some experts also suggested that the shortage of dollars in the next two to three months could lead to gasoline and diesel rationing, ultimately affecting trade and industry and even the agricultural sector, which needs diesel fuel during the harvest season.

“The dollar is the key for Pakistan. We are all watching and waiting for the resumption of talks with the IMF as we wait for Chinese help in the form of debt novation,” said a senior banker.

Published in Dawn, January 18, 2023