The Pakistan Business Council (PBC), one of the country’s largest corporate advocacy platforms, warned that the ongoing rapid decline of rupee against the US dollar is “a perfect storm” for Pakistan.
Taking to social media platform X, formerly known as Twitter, it said that the exchange rate decline is attributable to a combination of factors.
This includes “premature relaxation of imports, weakening exports, diversion of home remittances to Hawala, which in turn feeds the strong demand for US dollar by smugglers and the informal/under-invoiced traders”.
“For the country, this is a perfect storm,” warned PBC.
A caretaker administration is currently governing Pakistan, and is primarily tasked to steer the country through to a national election. However, it remains engulfed with acute political tension, as well as record high inflation and interest rates.
Meanwhile, the PBC in its note was of the view that the import pressure on reserves (and hence the value of the rupee) will ease fairly quickly as banks rebalance their open positions.
“Exports, however, are a function of global demand,” said PBC, and Pakistan’s ability to offer value in comparison with alternative sourcing countries.
“Global demand is unlikely to revive due to monetary tightening in the main markets that we serve.”
The PBC said that the withdrawal of Regionally Competitive Energy Tariffs (RCET) for exporters by the government will not help the value proposition, and customers are likely to maintain their demand for the “unreliability discount” when sourcing from what they perceive to be a risky country.
The body also questioned the role of State Bank of Pakistan (SBP) Monetary Policy Committee (MPC) when it comes to the management of the exchange rate.
“What then is the role of our monetary policy premised on high interest rates in managing the value of the Rupee?” PBC questioned.
The council said that with over Rs9 trillion cash in circulation, there is enough liquidity available to speculate in currency and gold.
“This Rs9 trillion is un-banked money, to its holders, neither bank deposit accounts, nor money market investment, however, high the returns may be, are irrelevant whist the rising value of the US dollar is an attractive proposition,” it said.
The PBC highlighted that overseas Pakistanis sending money through Hawala fetches over Rs15 more on the US dollar against remitting through banking channels.
“So long as smuggling is rife and attractive, the differential in inter-bank and Hawala rate will subsist and remittances will divert to the latter.”
The council also identified opportunities that need to be communicated effectively.
“With a bumper cotton crop and increased demand for Pakistani rice following the Indian export ban, the balance of trade could benefit by up to $3 billion per annum.
“That’s the size of the International Monetary Fund (IMF) Stand-By Arrangement (SBA). And that’s before any skillfully negotiated foreign investment by the Special Investment Facilitation Council (SIFC),” it concluded.