INSIGHT: Pakistan rupee plunges to record low amid economic crisis, US dollar shortage

Pearl Bantillo


SINGAPORE (ICIS)–Pakistan’s currency – the rupee – plunged to a fresh record low on Friday as its economic problems pile up amid a severe lack of US dollars to pay for imports, underscoring an immediate need for bailout funds from the International Monetary Fund (IMF).

At 06:38 GMT, the Pakistani rupee (PRs) was trading at PR250.501 against the US dollar in a highly volatile trade, which saw the pair hitting an intra-day high of PRs231.781.

At current prices, the Pakistani rupee has shed about 11% of its value from the start of the year, making imports more expensive while the central bank’s foreign exchange reserves continue to shrink.

As of 13 January, Pakistan’s foreign exchange reserves can barely cover one month’s worth of imports, also because of contractions in both exports and remittances, according to Spain-based FocusEconomics in its February Consensus Report on East and South Asia.

According to media reports, the State Bank of Pakistan’s (SBP) US dollar reserves was at less than $5bn, down from more than $16bn in end-January 2021.

Pakistan procures 100% of its polyolefin needs via imports, which came to a halt in the week of 9 January 2023 following the central bank’s decision to put a stop to the issuing of letters of credit (LCs) to “non-essential” businesses.

Importers of recycled polyethylene terephthalate (R-PET) and recycled polyethylene (R-PE) were struggling to settle payments with suppliers, prompting Asian recyclers to halt shipments to Pakistan.

Concerns over securing LCs have been crippling activity in the Pakistan market since August 2022, exacerbated by devastating summer floods and dwindling foreign exchange reserves that dropped to their lowest levels since 2014.

A nationwide blackout engulfed Pakistan at the start of the week following a grid failure which took hours to be resolved, while the country is still reeling from massive economic damage wrought by unprecedented flooding in June-October 2022.

Overall production is being threatened by high energy costs, inflation and an extreme shortage of US dollars to finance imports of raw materials.

The main Karachi port is severely congested as a consequence, with thousands of containers stuck at the port, according to media reports this week.

“We have revised down our forecast growth in the fiscal year ending June 2023 (FY23) to 1.5% from 2% at the time of our last review of Pakistan’s rating in October, and risks are now further to the downside,” Fitch Ratings director for Asia-Pacific sovereign ratings Krisjanis Krustins told ICIS, adding that Pakistan’s inflation is projected to be higher at 24%.

To tame strong inflationary pressures, the SBP on 23 January hiked its policy interest rates by 100 basis points (bps) to 17%.

In its monetary policy statement, the central bank had stressed that completing the pending ninth review under the  IMF’s extended funding facility (EFF) “is critical for reducing uncertainty and unlocking multilateral and bilateral inflows”.

The IMF is scheduled to send a review mission to Pakistan next week.

The south Asian country is hoping to revive a stalled bailout package from the global financial stability watchdog which comes with stringent conditions, including a market-based exchange rate, higher electricity and gas rates, and additional taxes to contain the fiscal deficit.

Pending approval from the IMF is the release of $1.1bn, originally scheduled for disbursement in November 2022 as part of a $6bn bailout package that Pakistan secured in 2019.

“For Pakistan to return to the IMF programme, it will have to agree to the IMF’s conditions. Given Pakistan’s uneven record of performance under IMF programmes in the past, there is unlikely to be much flexibility on these conditions, in our view,” Krustins of Fitch Ratings said.

“Returning to compliance with the IMF programme is critical to securing new external funding, including from friendly countries, to finance growth and post-flood recovery.”

Pakistan is reeling from hefty economic damage sustained following unprecedented flooding in June-October 2022, which submerged a third of the country in water.

“Floods have caused an estimated USD 40 billion in damage and, by destroying crops, have stoked inflation and imports,” FocusEconomics said.

“The risk of a balance of payments crisis remains high, with social unrest further clouding the outlook,” it said.

BOP measures an economy’s transactions involving foreign exchange with the rest of the world.

With contributions from Nadim Salamoun and Arianne Perez

Insight article by Pearl Bantillo

(Thumbnail image: Pakistani rupees – Photo by Tahir Ikram)

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