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Remittances and industry backed rupee hits back at dollar

Pakistani rupee rises to a 10-month high against the US dollar. This comes as remittances continue to rise, Large Scale Manufacturing is producing higher outputs than last year.

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The Pakistani Rupee makes gains against USD throughout the week, with the rate on 20th march being 155.7(buying rate) and 156.5 (selling rate) in the open market, with 10-months lowest.

The currency is appreciating constantly since 26th January 2021, when a US dollar was 160.75 Pakistani Rupee.

Read More: Pakistani Rupee hits all-year high

Under the current government, SBP let the rupee depreciate massively in the inter-bank market after the finalization of an agreement with the International Monetary Fund (IMF) for a loan program on May 12, 2019. The international lending institution had asked Pakistan to end fixing of the exchange rate and allow it to float freely to find its own market equilibrium using demand and supply against the US dollar and other currencies.

When the government allowed it to float, the rupee lost its value shockingly fast, by seven rupees being 141.62 on 10th May to 148.20 on 17th May. The entire second half of 2019 and early two and a half months of 2020 was spent with a US dollar being between 150 and 160.

However, with the advent of COVID in Pakistan on 26th February, when two cases were announced by the Prime Minister’s Special Assistant on Health Zafar Mirza, the exchange rate shot up to 160 in days, with the Dollar being on 166.53 Rupees on 3rd April.

The highest exchange rate was on 27th August, when the dollar reached 168.43 PKR, and market speculations were that it would hit 175 and 200 eventually.

Over the last six months, the dollar has depreciated against Pakistani currency by 13 rupees, increasing the value of local currency by 8%. This has resulted in the reduction of debt value by Rs. 1300 billion.

This would save a lot of money for Pakistan in the import bill and the purchasing power of the rupee against the dollar has relatively increased.

Factors

There are many institutional and market-based factors that have led to this appreciation of the Pakistani Rupee in the market.

Firstly, the introduction of institutional factors like Roshan Digital Accounts (RDAs) has increased the demand for local currency as people are sending money to Pakistan in these accounts. The increased demand has led to the appreciation of the currency.

Additionally, the FDI has been high with the introduction of a new scheme under the Naya Pakistan Certificate, government securities with higher interest rates than those offered in the international financial institutions. This has led to increasing foreign exchange reserves, another currency stabilizer.

Another factor for the increase in the use of these official channels by the Pakistanis abroad is the reduction in Hawala and Hundi. This is because of the restriction in air travel to GCC countries like Saudi Arabia and UAE. This corresponds with the fact that these countries are the biggest contributors to RDAs.

Read More: Pakistani Rupee to keep strengthening against dollar

Industry inside of Pakistan has been doing well during this 8MFY21. Large-scale manufacturing (LSM) continues to rebound at the start of the year. January 2021 saw the highest monthly index value for LSM at 175, registering 9.1% growth year on year. Across the 7 months of FY21 LSM growth registered 7.85%. Huge contributors to this have been the Textile and Cement sectors of the country.

 

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