Rapid Decline of Rupee ‘A Perfect Storm’: Pakistan Business Council

The rapid decline in the value of the Pakistani Rupee is attributable to a combination of premature relaxation of imports, weakening exports, and diversion of home remittances to hawala, which in turn feeds the strong demand for US dollars by smugglers and the informal/under-invoiced traders.

For the country that is a perfect storm, said the Pakistan Business Council (PBC) in a tweet.

According to the PBC, import pressure on reserves (and hence the value of the Rupee) will ease fairly quickly as banks rebalance their open positions. Exports, however, are a function of global demand and Pakistan’s ability to offer value in comparison with alternative sourcing countries.

“Global demand is unlikely to revive due to monetary tightening in the main markets that we serve. Withdrawal of Regionally Competitive Energy Tariffs for exporters will not help the value proposition, and customers are likely to maintain their demand for the “unreliability discount” when sourcing from what they perceive to be a risky country,” it stated.

The rapid decline in value of the PKR is attributable to a combination of premature relaxation of imports, weakening exports, diversion of home remittances to hawala, which in turn feeds the strong demand for $ by smugglers and the informal/under-invoiced traders. For the country…

— The Pakistan Business Council (@ThePBC_Official) August 31, 2023

PBC questioned the science behind the central bank’s market reviews when it comes to the management of the exchange rate. “What then is the role of our monetary policy premised on high interest rates in managing the value of the Rupee? With over Rs. 9 trn cash in circulation, there is enough available to speculate in currency and gold. This Rs. 9 trn is unbanked money, to its holders, neither bank deposit accounts, nor money market investment, however high the returns may be, are irrelevant whilst the rising value of the $ is an attractive proposition,” it remarked.

The Council explained that overseas Pakistanis sending money through hawala fetches Rs. 15+ more on the dollar versus remitting through banking channels. So long as smuggling is rife and attractive, the differential in interbank and hawala rates will subsist and remittances will divert to the latter.

There are upsides that need to be communicated effectively. With a bumper cotton crop and increased demand for Pakistani rice following the Indian export ban, the BOT could benefit by up to $3 bn per annum. That’s the size of the IMF SBA. And that’s before any skillfully negotiated foreign investment by the SIFC, the Council concluded.