Rupee’s comeback is temporary, further drop is on the cards

August 1, 2018

The Pakistani rupee hit an all-time high of Rs130.5 against the dollar in the open market on July 20, but rebounded sharply in the following week and closed at Rs122 on Monday. This comeback, however, is temporary because both international and local analysts say the currency may depreciate another 10% to 15% and cross Rs140 before it stabilises.

The rupee’s downward slide ended after reports of a $2 billion Chinese loan reached the market just before the elections. Later, the Islamic Development Bank activated its $4.5 billion credit facility for Pakistan and provided further support to the rupee.

The Chinese loan and the IDB credit line may have provided breathing space, but the incoming government will need more than $10 billion to meet its external finance needs for the current fiscal year and seek a bailout from the IMF to stave off an economic crisis.

The funds will be subject to several conditions, including a weaker rupee. Analysts say the rupee was artificially overvalued at Rs106 by the previous government for at least three years and has just reached its fair value.

The IMF may ask the government to depreciate it further because in order to support to exports and discourage imports. This adjustment is a necessary evil to stop the bleeding of the foreign exchange reserves, which stand at $9 billion, their lowest level in four years.

On Wednesday, the dollar traded at Rs124 in the interbank market and Rs125 in the open market.