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Tuesday, May 21, 2024

Pakistani Rupee Gains Ground Against the US Dollar Amid Crackdown

This surge in the rupee's value is occurring against the backdrop of stringent measures to control the outflow of foreign currency.

In the latest financial report, the Pakistani rupee continued its upward trajectory on Wednesday, posting a gain of one rupee or 0.36 percent against the US dollar in the interbank market, as per data released by the State Bank of Pakistan.

At the close of the trading day, the US dollar was quoted at Rs279.51 in the interbank market. This marked a notable improvement from the previous day’s closing rate of Rs280.51.

Notably, the greenback also saw a decline of one rupee in the open market, breaking the Rs280 barrier for the first time since July.

This surge in the rupee’s value is occurring against the backdrop of stringent measures to control the outflow of foreign currency from the country’s currency market.

Market Insights Mohammed Sohail, CEO of Topline Securities, attributed this “record monthly gain” to stringent compliance with local laws, a shift from the past practices of currency smugglers and investors. He noted that the sustenance of this trend would depend on Pakistan’s performance in its upcoming International Monetary Fund (IMF) loan review in November and its ability to boost its dwindling foreign exchange reserves.

Komal Mansoor, Head of Strategy at Tresmark, expressed the view that an exchange rate around Rs285 to a US dollar represents a solid fundamental level. She emphasized that stability is crucial for businesses as excessive exchange rate volatility can disrupt operations. Importers, in particular, could face substantial inventory losses due to purchases made at higher exchange rates.

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Mansoor also pointed out that Pakistan’s real effective exchange rate (REER) valuation stands at 102, which implies an overvaluation of the currency. REER measures a currency’s value relative to its major trading partners, with an index value of 100 representing equilibrium. An REER value above 100 suggests an overvalued currency, and the continued depreciation of the rupee against the dollar may raise concerns at the IMF.

Meanwhile, despite the crackdown on illegal currency activities, the expected surge in remittances for September did not materialize as anticipated by the country’s economic managers and the State Bank of Pakistan. Instead, remittances showed a modest month-on-month increase of just over 5 percent.

However, in the first quarter, remittances recorded a 20 percent decline compared to the same period in the previous year. This suggests that the crackdown on illegal currency businesses and smuggling did not substantially boost remittance inflows, contrary to earlier hopes.

The financial sector had initially been optimistic about the positive impact of the crackdown, with reports of increased inflows from overseas Pakistanis.