Reasons for massive depreciation of PKR against US Dollar

BusinessReasons for massive depreciation of PKR against US Dollar

The movement in the USD-PKR exchange rate is based on demand and supply of foreign exchange in the Foreign Exchange (FX) market and prevailing economic conditions under a market-based flexible exchange rate arrangement. Under this system, the exchange rate is determined by the market forces of supply and demand, and the trend in exchange rate primarily reflects the balance of payments position of the Country.Reasons for massive depreciation of PKR against US Dollar

During the Fiscal Year (FY) 2023-24, the Pakistani Rupee (PKR) has appreciated by 0.2% against US Dollar (USD) and closed at PKR 285.29 per USD as on 06 November 2023.

The FY24 started with positive news of staff level agreement (SLA) with the International Monetary Fund (IMF) under a Stand-by Arrangement (SBA) resulting in a wave of positive sentiments and PKR appreciated by 3.8% in a single day to close at PKR 275.44/US$ on 04 July 2023 compared to PKR 285.99/US$ as of end June 2023.

However, these positive sentiments could not be sustained as demand of US Dollar in interbank market outpaced the supply and resulted in gradual deprecation of PKR.

Starting second week of August 2023, the PKR came under pressure against USD, mainly on account of uncertainty related to the transition of government to the interim set up, continuity of economic reforms and IMF program etc. The depreciation continued till the first week of September 2023 when exchange irate peaked at 307.10 against USD on 5 September 2023.

Since then, PKR started appreciating against USD as a result measures taken by the government and State Bank of Pakistan (SBP) The USD-PKR exchange rate stood at 285.29 as on 06 November 2023.

Measures being taken by SBP to control PKR deprecation

The government and SBP have taken various measures to curb the pressure over PKR. The government has taken administrative measures to curb smuggling, hoarding and illicit transactions (e.g. hundi/hawala) which has improved USD liquidity in the market. Furthermore, the SBP has initiated a major structural reform in the Exchange Companies’ sector.

As part of these reforms leading banks actively engaged in foreign exchange business will establish wholly owned Exchange Companies to cater to the legitimate foreign exchange needs of general public.

Moreover, various types of existing Exchange Companies and their franchisees will be consolidated and transformed into a single category of Exchange Companies with a well-defined mandate.

In addition, the minimum capital requirement for Exchange Companies has been increased from PKR 200 million to PKR 500 million. These reforms have been introduced to provide better services to the general public and bring transparency and competitiveness in the Exchange Companies’ sector. This is expected to strengthen governance, internal controls, and compliance culture in the sector.

In addition to above measures adopted by the SBP and the government the improvement in Bank of Punjab (BoP) has also contributed towards stability in interbank foreign exchange market. The current account deficit in Q1 FY24 has been recorded to US$ 0.9 billion as compared to US$ 2.3 billion in Q1 FY23.

Following table summarizes the movement of exchange rate during recent years;Reasons for massive depreciation of PKR against US Dollar

Note: The above information was shared by the Minister for Finance and Revenue Shamshad Akhtar in the Senate on November 24, 2023.

Mati-Ullah is the Online Editor For DND. He is the real man to handle the team around the Country and get news from them and provide to you instantly.

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