After reaching a historic low of 175.27 against the dollar on October 26, the rupee bounced back after Saudi Arabia provided a $4.2 bn lifeline comprising of $1.2 billion as oil on deferred payments and the remainder as cash to support foreign exchange reserves. While a recovery of more than Rs 5 against the greenback in a matter of days to settle at 170.00 was impressive, it was always going to be short term. For the past two days, owing to uncertainty over the IMF resuming the stalled $6bn Extended Fund Facility (EFF), the rupee has yet again started to slide, losing Rs1.39 against the dollar yesterday to reach 172.00 after closing at 170.70 on Monday. On the IMF front, the review is now in the hands of their Strategy, Policy and Review Department and Legal Department whose stamped clearance is necessary before the case is forwarded to the Fund’s Executive Board, which means any breakthrough, whether or not there is to be one or not, will be delayed.
At the same time, the import bill continues to rise, as the government continues to purchase commodities such as wheat and sugar from the international market as an acute shortage persists domestically, owing to mismanagement of stock and an incapacity on part of the federal government to crack down on hoarders, or the mafias it promised would be pursued and brought to book relentlessly. Meanwhile, exports have not increased at a pace sufficient to help reduce trade imbalance. With the share of exports in GDP dropping from 16 percent in 1999 to 10 percent in 2020, any improvement in this number is unlikely, and frankly impossible unless systemic issues within the industry are addressed, an effort that will take years.
According to a World Bank report, the SBP has already pumped around $1.2 billion into the interbank currency market to stop the rupee from spiraling out of control, which is a departure from its stated policy of maintaining a ‘free float’ or a ‘managed float’ exchange rate, both of which do not involve throwing dollars into the market. Apart from its impact on inflation, that is already at a record high, currency volatility hurts businesses as well, as it cannot be factored in accurately in their budgets, forcing them to pass on the extra cost to consumers. It is necessary now that the central bank provide clarity over how it plans to manage the rupee-dollar parity going forward in order to calm the market down.
