The exchange rate has been hit exceptionally hard by a steep decline in the State Bank of Pakistan's (SBP) foreign exchange reserves, which have shrunk to approximately $4.4 billion, the lowest in almost a decade.
Contagion of Economic Crises
The stock market, also affected by political instability and negative economic outlook, is also declining sharply. The benchmark KSE-100 index at the Pakistan Stock Exchange (PSX) fell 3.5 per cent on Tuesday to close at 38,342.21 points. However, the KSE-100 was up 0.63% to 38,584.87 points as of the filing of this report.
Currency experts said the Rupee has been falling despite being "guarded" by the SBP. On Tuesday (yesterday), the interbank rate closed at Rs. 228.66 against the dollar.
The Pakistani currency last appreciated against the dollar on 1 December 2022, and that too only 0.12% to close at Rs. 223.69 to the greenback. The decline has been picking up momentum in recent days, as the Rupee has been going down consistently during the last twenty trading sessions.
Amidst a critical scarcity of dollars, the gap between dollar exchange rates in the interbank and open markets has significantly spread out, which is drastically hurting the economy as well as diverting remittances from the legal banking channel to the 'grey' market, where the Pak Rupee opened at Rs. 238.75 to a dollar on Wednesday (today).
Economic growth prospects are also dismal, as the country grapples with a multitude of external and internal shocks.
Cascading Meltdown due to Dollar Shortage
The SBP’s reserves — estimated at less than $4.4bn — are alarming for the country, and unending political uncertainty had destroyed the Pakistan's ability to secure credible guarantees of support from any avenue. Even though allies like Saudi Arabia have promised billions, Pakistan continues to loom under the threat of default.
The finance ministry has assured exporters of easing curbs on imports for their inputs, but currency experts are still waiting for signs of improvement. “We need immediate help to save the country from default and the people from a situation like Sri Lanka,” a currency dealer urged.
Exporters welcomed the decision, but opined that it was too little too late, since they had already lost a significant share in the international market, especially in the textiles sector where Bangladesh has capitalized on its competitive edge during the last six months. Meanwhile, importers are hard hit by the dollar shortage, as thousands of containers of imported products are stuck at Pakistan's ports waiting for clearance documentation so that they could be supplied to local markets.
Bankers believe that the country would soon begin to notice the shortage of petroleum products, along with other basic essentials like food items. As banks are delaying the issuance of letters of credit (LCs) to importers, supplies are wasting away at the ports, while shortages are creating severe bouts of food inflation — and at times, unavailability of essentials such as wheat — for the masses.
Some experts also hinted that the shortage of dollars could force the government to introduce rationing of petrol and diesel in the next two to three months. Such a measure would ultimately hit trade, industry, and even hit the agricultural sector which depends on diesel supplies during the harvesting season.