Rupee appreciates to four-month high against US dollar

According to economists, international currency rates may have affected rupee's value.

KARACHI (Dunya News) – The Pakistani currency rose to a four-month high against the U.S. dollar by gaining another 8 paisa in the interbank market on Monday. The rupee recovered to Rs155.98 during the early trade hours and the open market is expected to follow the similar trend.

According to economists, international currency rates and devaluation may have affected currency rates in Pakistan.

On Sunday, the World Bank forecasted Pakistan’s economic growth to slow down for the next two years as it faces yet another macroeconomic crisis due to massive twin deficits and low foreign reserves.

A report entitled “South Asia Focus: Making (De)centralisation Work” stated: “GDP growth (at factor cost) decelerated to 3.3 percent in FY19 – 2.2 percentage points lower than FY18 - as gradual policy adjustments to tackle macroeconomic imbalances started to take effect. These adjustments included a tightened monetary stance, cuts in public sector development expenditures, and enhanced focus on higher tax collections. As a result, large scale manufacturing, which accounts for half of overall industrial output, contracted by 3.6 percent in FY19. The services sector, which contributes over 60 percent to total output, decelerated to 4.7 percent in FY19 compared to 6.2 percent last year.”

Importantly, it predicted that inflation is expected to increase in fiscal year 2020 to 13pc but it will start declining afterwards. The increase in prices will be driven by the second-round impact of exchange rate pass-through to domestic prices.

Despite significant devaluation, the WB still sees the Pakistan rupee overvalued by the end of September by approximately 4.8%.

In the last two months, the local currency was observed to significantly recover against the greenback in both interbank and open markets.

Earlier, analysts had expressed fear that the intense ongoing trade war between the United States and China would result in fluctuation of the U.S. dollar in the local market, and the value of the Pakistani rupee would stabilise depending on the measures taken by the government with appropriate economic policies.

Currency traders were of the view that the increasing inflows of remittance have supported the local rupee in the market.

Previously, the rupee was observed to cumulatively depreciate against the greenback, which in turn, had resulted in increased prices of goods and hardships for the general public.

The SBP has let the rupee depreciate significantly in the inter-bank market after finalising an agreement with the International Monetary Fund (IMF) for a loan programme on May 12.

The IMF asked Pakistan to end state control of the rupee and let the currency move freely to find its equilibrium against the US dollar.

On the other hand, the World Bank Group has also supported the idea of leaving the rupee free from state control in an attempt to give much-needed boost to exports and fix a faltering economy.

After the International Monetary Fund (IMF) lent the first tranche of $991.4 million to Pakistan, the local currency had depreciated massively.

The stringent conditions – on which the global moneylender has formally approved the bailout package of $6 billion for Pakistan – seemed to have exerted more pressure on the local currency.

The gradual drop in the rupee had come due to high demand for the dollar against thin supply as the country continued to make aggressive international payments to partially pay off huge foreign debt and for imports.

Economists were of the view that effective measures must be implemented on the priority basis to recover the state from the balance of payment deficit.

Besides increased demand of the greenback in the local market, they had termed ‘balance of payments deficit’ as the main reason in the recent hike in the value of the US dollar.

Moreover, they had considered that state’s exports and investment were required to grow significantly, and the imports must be reduced to remove pressure on the local currency.

According to experts, the government must ensure implementations on economic policies after the deal with the IMF.