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USD to PKR: Why Pakistani Rupee depreciates against US Dollar?

The value of Pakistani Rupee (PKR) has depreciated against the US Dollar from PKR 157.54 per US Dollar as of end June 2021 to PKR 215.49 per US Dollar as on August 12, 2022, reflecting a depreciation of 26.8 percent.

The movement in PKR is primarily a reflection of balance of payment position of the Country.

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During the first 11 months of the previous Fiscal Year 2022, the current account had recorded a deficit of US$ 15.2 billion compared to a deficit of US$ 1.2 billion in the same period last year. The rising international commodity (including oil) prices and incremental imports owing to spurt in economic activity were the major contributors towards the rising current account deficit.

It may please be noted that since May 2019, Pakistan has adopted a market based flexible exchange rate system, where the exchange rate is determined by market demand and supply conditions and trend in the exchange rate is generally a reflection of external balance of payment conditions of the Country.

Under the new system, role of the State Bank of Pakistan’s (SBP) interventions in the forex market is limited only to avoid disorderly market conditions and build F buffers without suppressing any underlying trend.

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Now, the exchange rate serves as the first line of defence against external shocks and helps to protect the Country’s valuable foreign exchange (FX) reserves and to reduce the risk of a balance of payments crisis.

Role of State Bank of Pakistan

In response to the increasing value of US Dollar over the recent past, the SBP has already and proactively taken measures aimed at managing rising imports, slowing domestic demand and easing the pressure off PKR/USD parity.

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These measures include:

  • Increase in policy interest rates by 8.0 percent since September 2021;
  • Changes in prudential regulations for auto financing in particular and consumer financing in general (Reason: automobile and cell phone imports are rising and contributing to the current account deficit.);
  • The SBP has prescribed an increase in cash reserves requirement (CRR) for Banks;
  • Imposition of 100 percent cash margin requirement on mostly consumer-oriented import items in September 2021. These items include consumer electronics (microwaves, LCD TVs, refrigerators, washing machines), construction-related items (ceramics, tiles), and transport-related goods (tyres, body parts), among others. These items are also produced locally, and the country can save valuable foreign exchange by discouraging their imports.
  • The SBP has shortened the time period allowed for realization of full value of goods exported by the due date or a maximum of 120 days, whichever is earlier.
  • The SBP has undertaken efforts to curb unnecessary cash foreign exchange outflows, especially, via exchange companies. These include limiting the amount of cash FX that can, be purchased by people visiting Afghanistan; biometric verification for all cash FX transactions over US$ 500; and use of banking channels for cash FX purchases over US$ 10,000. There is a now a prescribed maximum limit of US$ 10,000 per person per day for buying foreign currency and a maximum limit of US$ 100,000 per person per calendar year for the same. Moreover, the Federal Board of Revenue (FBR) has introduced a system that would require people who are going abroad to declare the foreign currency being taken along with them;
  • During May 2022, the government of Pakistan also banned import of a number of non-essential goods to curb the rising import bill;
  • With an aim to augment the Country’s foreign exchange reserves, the government of Pakistan as well as the SBP seek to tap all available and potential sources of inflows:
  • The state level agreement with the International Monetary Fund (IMF) for the release of next tranche under the ongoing EFF program are in process;
  • Further, in the budget estimates for the Fiscal Year 2023, the government of Pakistan has planned foreign exchange inflows from various multilateral/bilateral sources.
  • The realization of these inflows shall improve foreign exchange liquidity in the Country and thus support build-up of foreign exchange reserves of the Country.

 

Note: The above information (with amendments) was shared by the Minister for Finance and Revenue Miftah Ismail with the National Assembly on August 13, 2022.

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Mati
Mati
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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