The Pakistani rupee has surged an astonishing 11 percent against the U.S. dollar trading at Rs 99.75 on the open market Wednesday. Investors celebrated the currency appreciation while exporters denounced the government for a monetary intervention they claim will harm business. Meanwhile, the apparel and textile industry scrambles to respond to very sudden and considerable price increases affecting their outstanding orders.
In the middle of last week, the rupee was trading at about Rs 105 per U.S. dollar and then began a breakneck appreciation, closing Friday at Rs 102.95. By Monday it had strengthened to Rs 101 per U.S. dollar. The State Bank of Pakistan (SBP) just announced that the interbank exchange rate now stands at Rs 99.9521. Pakistani Finance Minister Ishaq Dar said he expects the rupee to continue its march toward higher value on the open market. Last November, the rupee dropped as low as Rs 111 per dollar.
In response to the rupee’s movement, the Karachi Stock Exchange Index, considered by many to be the most reliable barometer of Pakistan’s economic health, has jumped 1,393 points since March 3. On Monday, the index gained 132.76 points to close at a record 27,309.02 points.
According to financial experts, there is a complex constellation of reasons that accounts for the rising strength of the rupee. The country received foreign direct investment of $523 million dollars from the U.S. in the first seven months of their fiscal year, with $106.9 million in the month of January alone. Also, the Pakistan government expects $550 million from the International Monetary Fund next month. Overall, the country increased its foreign reserves to $9.5 billion. An increase in foreign reserves typically functions as an anti-inflationary measure.
Additionally, an influx of workers’ remittances has remained robust for 2014, increasing a brisk 11 percent over last year to $10.2 billion. In February, total remittances stood at $1.2 billion.
Undoubtedly, the appreciation of the rupee has been supported by several government measures; a prohibition of the importation of gold certainly boosted the currency’s value. And now a tempestuous debate has erupted over the nature of Pakistan’s newly interventionist monetary policy and the disparate ways the rupee’s rise will affect different compartments of the economy.
According to a report in Pakistan Today, anonymous sources claim that the government has accelerated its buying of U.S. dollars for the purposes of propping up the rupee. “The State Bank, on the behest of exporters, has been buying dollars from the free market. Otherwise the dollar would have come down to Rs 98 level.”
The Pakistan government vehemently denies engaging in any currency manipulation. Umar Siddiqui, an SBP spokesman, said, “I have no idea about any such development.” Siddiqui claims the rupee was already on the rise due to bilateral and multilateral capital flows slated to come in soon. Also, Malik Bostan, president of the Exchange Companies Association of Pakistan, said, “The current exchange rate is not artificial. Rather, a banks cartel backed by some influential politicians has been conspiring to make the rupee depreciate to a record level.”
The banking community claims that, if anyone is responsible for currency manipulation, it’s overeager investors and speculators. Shaukat Tarin, a banker and former finance minister, said, “The banks are not capable enough to manipulate the exchange rate. They operate in the limits defined by the State Bank. This is the speculators’ game who are sitting outside the banks.”
The effects of the rupee’s upward movement has been positive for some and negative for others, creating a schism within the business community. Importers and money exchangers have greeted the currency’s appreciation with open arms while exporters have decried the development as economically disastrous.
Experts are still unsure what the ultimate impact will be on prices and how long it will take for those consequences to set in. There will likely be an improvement in the price of domestic consumer goods. The prices of gas and diesel should also drop modestly. And while goods imported into Pakistan will be cheaper for domestic consumers, apparel and retail businesses should expect the cost of Pakistan’s exports to increase sharply.