In a significant blow to Pakistan’s economy, the rupee plummeted to an unprecedented low against the US dollar in the open market. The currency’s value dropped by Rs2, reaching Rs301 per dollar, with reports suggesting it even traded as low as 305 in some areas. This depreciation highlights the country’s limited reserves and its struggle to narrow a substantial current account deficit.
The Exchange Companies Association of Pakistan (ECAP) reported the alarming decline, attributing it to a scarcity of dollars in the market. Zafar Paracha, the General Secretary of ECAP, stated that banks were hesitant to provide cash dollars to exchange companies, while clients were reluctant to sell dollars in the market. As a result, the open market rate stood at Rs15.18 higher than the interbank closing rate of 285.82 per dollar.
Experts believe that the root cause of this exchange rate volatility is the ongoing political instability in the country. If the dispute between the coalition government and Imran Khan, the chairman of the Pakistan Tehreek-e-Insaf, persists and the International Monetary Fund (IMF) decides against providing financial assistance, further depreciation of the currency is anticipated. Bloomberg economists suggest that if Pakistan fails to secure financing, the rupee could potentially fall as low as 350 to the dollar by June.
The delay in the IMF bailout program and the prevailing political uncertainty have led to a loss of confidence in the currency. An economist at Bloomberg argues that the rupee is undervalued by approximately 14 percent. The economist adds that the country’s debt crisis exacerbates the difficulty in determining the rupee’s fair value, with dollar shortages and import restrictions artificially lowering the current account deficit. The economist estimates the rupee’s fair value to be around Rs244 per dollar.
Political instability in Pakistan has persisted since Khan’s removal as prime minister in April 2022. His recent arrest, albeit brief, has escalated tensions between him, the government, and the military. Following Khan’s jailing, the rupee plunged to a record low of 299 per dollar but later recovered to settle at 285 after his release. However, should the clashes between Khan and the government persist or if the IMF decides against extending loans, further depreciation of the rupee is expected.
Analysts are increasingly concerned about the growing likelihood that the IMF will not provide a much-needed bailout, which could lead to a potential default for Pakistan in the upcoming fiscal year. Consequently, capital is leaving the country, intensifying the strain on Pakistan’s balance of payments. With foreign exchange reserves at a meager $4.3 billion, barely enough to cover one month of imports, the country’s economic position remains precarious.
Pakistan’s economy is facing a severe crisis as the rupee hits a record low against the US dollar in the open market. The scarcity of dollars, combined with political instability and potential IMF aid delays, has fueled exchange rate volatility. The nation’s leadership struggles, coupled with its limited reserves, have heightened concerns about default. Immediate measures are necessary to stabilize the economy and restore investor confidence.