High imports, dollar smuggling to Afghanistan are main reasons
The dollar rate has moved up by Rs16 during the last four months as it nears its previous high reaching Rs168.3 on Friday. The previous high was Rs168.7 in the interbank last year in August.
The dollar rate was Rs152.4 on May 7 earlier this year.
“It’s the high imports that has pushed the dollar rate up,” said senior research analyst Karim Punjani.
Pakistan recorded its highest-ever trade deficit of $4.2 billion in August, an increase of 144% over the previous year, data from the Pakistan Bureau of Statistics showed.
A trade deficit means we are paying more on goods and services we are buying from the world than what we are earning by selling our products and services to them.
Pakistan’s exports in August were up 41% to $2.2 billion compared to the same month of 2020, but this was barely enough to keep the trade balance in the positive range. This is because we are spending almost three dollars in imports for every dollar earned from exports as reflected in the latest data. Our imports during August were $6.5 billion, up 95% versus August 2020.
The dollar was selling at Rs168.7 on Friday in the open market. The difference between interbank and open market rates is that that interbank rate is the rate at which banks trade dollars between them while open market rates are those at which the general public can buy or sell dollars to money changers.
There is a difference between respective selling and buying dollar rates, which is the commission a bank or money changer charges.
According to commodity expert Adnan Agar, the high imports and economic crisis in Afghanistan have been the reasons behind the recent hike. He added that Afghanistan is in dire need for dollars and there are reports that dollar has been smuggled into Afghanistan from Pakistan.
Exchange Companies Association Pakistan (ECAP) Secretary Zafar Paracha said that Pakistan would start trading with Afghanistan in Pak Rupee but its impact will not reflect immediately. It will take time.
“The rate has moved up if you see the last six months. But if you see the last two years, rupee has devalued by something around 3%. The average is 4% to 5% during the last 20 years,” said Punjani.
He added that the dollar rate jumps when a new government is formed.
“The new government has to devalue rupee to survive. This has been the phenomenon we have been seeing during the last twenty years,” Punjani added.
“A government keeps exchange rate fixed for positive public sentiments but a new government has to devalue rupee to keep economy afloat,” he added.
Punjani further said that Pakistan needs to attract foreign direct investment (FDI) and also work on import substitution. He said that FDI can also help Pakistan increase exports.
Agar was also of the similar view that the dollar rate isn’t coming down if imports are not substituted and exports were increased.
All three experts see the dollar rate going up in near future but expects the State Bank intervention if rupee devalues by another 5%.
“Dollar rate will go up by around Rs2-3 before stabilizing,” Paracha said. The other two analysts see it going a bit further down before it stabilizes.