The US dollar’s flight is showing no sign of descent since markets reopened after Eid. The greenback has surged Rs4 in the interbank market in just four trading sessions.
The dollar rose another 90 paisas on Tuesday and traded at a six-week high of Rs165 in the opening hours. The open or cash market, which opens later in the day, normally follows a similar trend. In the last three days, it closely followed the interbank market.
In March, the first full month of lockdown, remittances to Pakistan were down 5% and it may worsen as global financial institutions have predicted a 20% dip in foreign remittances. Pakistan’s exports plunged 24% in April. Exports and remittances are the two main sources of earning dollars for Pakistan and the outlook for both is negative. The investment outlook isn’t good either.
The country received $1.4 billion in emergency cash support from the IMF, which helped stabilize exchange rates last month despite foreign debt payments and falling remittances and exports. However, analysts warn that the worse has yet to come. In a separate report on Covid-19’s impact on the economy, the central bank pointed to a possible devaluation of the rupee in case the lockdown extends.
However, some media reports suggested the recent changes in exchange rates are more speculative than based on fundamentals. While dollar inflows will remain under pressure due to negative outlook for exports and remittances, the country is likely to benefit from the relaxation on its foreign payments obligations after the G20 countries deferred loan payments till December. Pakistan is also preparing for an international bond auction to raise more dollar capital to keep its dollar reserves at a comfortable level. As of May, Pakistan had $12.3 billion in its reserves, enough to meet four months of import payments.
Two months ago, the dollar was very volatile. It rose to an all-time high of Rs169 on March 27 before a central bank intervention brought it down to Rs167 the same day. That sudden rise (a jump Rs10 in a matter of days) was primarily caused by an outflow of hot money that was parked in the country’s treasury bills.
As foreign investors took the money out, it put pressure on our dollar reserves and exchange rates.