Currency Journal – BR Research


The currency is under pressure. After breaking through 164, the PKR / USD closed at 163.89 yesterday. This is the lowest level since October 20, and in the recent surge the PKR depreciated 7% from its peak. The question is, when will this depreciation stop, what is the ideal level of the currency, to what extent should the SBP intervene to counter rising imports due to growing demand and rising prices? commodity prices, and what are the SBP and MoF’s other policy responses to reduce the pressure on currency depreciation.

Pakistan is experiencing a somewhat flexible exchange rate regime for the first time in history. Since this phenomenon, this is the second time that the currency has depreciated and sent stage fright. In the first case, this was mainly due to COVID-related releases in March20. This was mainly due to the outflows of hot money. Today there is no hot money; but every product is hot. This drives the import bill and lets the currency depreciate.

It is difficult to state the exact level of the currency when it is determined by the market and sentiment plays a part in either direction. There are clear indications that SBP is intervening. This is clear from the fact that for the week ending July 23, SBP’s reserves fell by $ 220 million and there were no debt repayments. This means that reserves have plummeted as SBP supplied dollars to the market. SBP said the policy is to intervene in the market to reduce volatility (to reduce disorderly market conditions). However, the institution does not change the direction of the currency which is falling.

If anyone thinks that the market can function without SBP intervention, they are living in a paradise for fools. There is no way to finance the current account deficit apart from capital and financial flows (foreign investment and debt) or by burning reserves. The market has no ammunition. You have to choose on how much to intervene because without it, it could be a free fall. Not desirable at all.

The other point to consider if the flexible exchange rate is the right policy in the event of rising commodity prices. Well, the depreciation of the currency is a double whammy, as the pressure on domestic prices would come from both the increase in the prices of the dollar and the rupee. It’s too much to handle and needs to be addressed with a combination of factors.

One is to let the currency adjust a bit to dampen demand. The other is to raise interest rates a bit to dampen demand. Third, it is about getting rid of the expansionary fiscal (or political) stance. For example, gasoline sales are still high – partly because of an increase in tourism and general demand and the other factor is because the impact of higher prices on consumers is not. not reflected. The government must increase prices because the depreciation of the currency has more important inflationary consequences.

Then there are other factors. The government has reduced duties on imported (electric) cars and on CKD kits for domestically produced cars. Consumers reserve cars like anything. The higher number in July is based on demand from previous months as supply was low in June as people expected prices to drop in July. But the impact of low tariffs will become visible in the months to come. And with the depreciation of the currency, some automakers could raise prices again. The benefits to consumers can be fully or partially offset as the depreciation of the currency will impact the economy as a whole.

The SBP should manage the float by anchoring it to certain fundamentals such as the RRSP, the current account deficit, and the overall dollar demand and supply. After reaching this level, he should step in to manage market expectations and avoid dollarization of the economy as the average Joe is once again considering moving from PKR to USD. Not healthy.

Budgetary management must be careful. The first need is not to play with international oil prices and to pass the impact of commodity prices on to consumers. Otherwise, the consumer would pay it anyway in the form of PKR depreciation. Then the government should focus on generating higher debt-based flows (because liquidity is better in the international market) and wait for investment flows to arrive or for the commodity price cycle to reverse. .

The supply-demand situation is fluid. The flow of remittances is slower after Eid and a slight opening of travel – especially to the United States – where the growth in remittances has been the highest. Exporters are waiting to bring in the dollar in anticipation of a further depreciation to extract as much juice as possible. The SBP should give an end signal to the greed of exporters. This export-oriented policy must be reviewed. Capital flows are not completely open. Import substitution companies are at a loss. Companies with foreign partners could not synchronize the market because the outputs have problems while the inputs (exporters) are synchronized according to their interest. SBP should seek to balance the act. And both the MoF and the SBP should have a coordinated policy that is best for all in the pressing circumstances.


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