USD-PKR — I parity – Opinion – Business Recorder
A reputable rating agency recently predicted that the USD / Rupee parity would reach around Rs 180-1 USD by next year. Their prediction is based on the presumption that there is a huge demand for USD in Afghanistan, putting undue pressure on the Pakistani rupee. In response to this analysis, I submit that it is not entirely correct that the current pressure is due to the demand from Afghanistan. The following is a report on Fitch’s forecast:
ISLAMABAD, Sept. 30 (Reuters) – Fitch Ratings on Thursday downgraded its forecast for the Pakistani rupee for this year and next due to various factors, including an increased flow of US dollars to neighboring Afghanistan.
Fitch’s forecast for the average rupee rate this year is now 164 to the US dollar, down from 158 previously. For 2022, Fitch now expects an average rate of 180 against a previous forecast of 165.
“Our expectation of further weakening of the currency is based on the deterioration of Pakistan’s terms of trade, the tightening of US monetary policy, as well as the flow of US dollars from Pakistan to Afghanistan,” a- he declared. The Pakistani rupee has fallen steadily since May. It was at 170.50 to the dollar on Thursday, more than 10% lower than its May high of 150.95. Analysts say the rupee has been hit by a consistently high demand for dollars due to the country’s current account deficit.
The rating agency based its analysis on the following three factors:
Deterioration of the terms of trade;
Tightening of US monetary policy; and
The flow of US dollars from Pakistan to Afghanistan.
Afghanistan has always been a problem for Pakistan’s economy. After the Taliban took control of Afghanistan, there are sanctions against the Afghan government for their USD reserves. Afghanistan’s demand for USD is therefore met from USD available in the Pakistani market. This means that the
Afghans increase demand for USD in Pakistan. In other words, the USD in Pakistan is transferred to Afghanistan. The main presumption is correct; however, there is a natural “cap” for such demand. Afghans buy USD against PKR. This means that a certain amount of Pakistani currency was already in Afghanistan. The total quantum of such a quantity with its concomitant flux has a natural ceiling. The size of this amount cannot be more than Rs 40 to 50 billion. If this is the cap, the total demand for USD will not exceed USD 300 million, which should not have a major negative impact on the USD-PKR parity. Afghanistan is therefore not the main factor behind the PKR slide.
The other reason given is the deterioration of the trade balance. The basic question in relation to this aspect is how much trade deficit Pakistan expects by June 30, 2022. Anyone who knows the Pakistani market knows that our exports will be in the range of $ 25 billion to $ 28 billion. This is a provisional amount. Our imports will be kept between $ 55 billion and $ 60 billion, leading to a trade deficit of around $ 28 billion to $ 30 billion, which will be funded by expected remittances of $ 25 billion to $ 28 billion. All of this leads to a net current account deficit of around $ 5-7 billion. All of these factors are already taken into account. No one ever predicted that the net current account deficit would be less than $ 5 billion. All of this was factored into the exchange rate prior to this speculative spiral. It is therefore not correct to say that there is something that is not taken into account in relation to the current account balance at the predictable exchange rate. The use of the trade imbalance figure in the case of Pakistan is totally unjustified because in our case the income from remittances is effectively greater than that from exports. The figure to be taken into account is the balance of the current account and not the commercial account.
In addition, a tightening of US monetary policy has no direct effect on the exchange rate of the Pakistani rupee. There can never be an exact determination or prediction regarding the USD-PKR pair; however, I will attempt to explain in the following paragraphs that the current downward trend is due more to speculative and conspiratorial theories than to real facts.
(to be continued tomorrow)
Copyright Business Recorder, 2021