In a surprising turn of events, the Pakistani currency experienced a remarkable recovery, surging by approximately 5.5% or Rs16 in a single day. This surge propelled the currency to a one-week high of Rs295 against the US dollar in the open market on Thursday. The Exchange Companies Association of Pakistan (ECAP) reported that the currency had closed at Rs311 against the greenback the previous day. With this significant recovery, the gap in the rupee-dollar exchange rate between the interbank and open markets narrowed down to about Rs10, compared to the previous gap of around Rs27. Let’s delve into the factors that contributed to this unexpected improvement and its implications for the economy.

Factors Behind the Currency Recovery

  1. Stabilization Efforts in the Interbank Market

Over the past few weeks, the Pakistani currency had shown signs of stability in the interbank market, hovering around Rs285/$. This relative stability paved the way for the recent recovery.

  1. IMF’s Recommendations and Government’s Response

The widening spread between the rupee’s value in the two markets prompted the International Monetary Fund (IMF) to advise the government to focus on restoring the proper functioning of the foreign exchange market. In response, the central bank allowed commercial banks to purchase US dollars from the interbank market for settling international payments made through credit cards. Previously, banks were purchasing an average of $10 million per day from the interbank market to meet overseas credit card payments.

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  1. Predictions of a Market Correction

Zafar Parachs, the General Secretary of ECAP, predicted a significant correction in the rupee-dollar parity following the central bank’s decision to allow banks to purchase dollars from the interbank market. He anticipated a recovery of around Rs20-25 in the currency’s value over the next few days, with Rs15-20 of that recovery expected on Thursday itself.

Implications for the Economy

  1. Narrowing Rupee-Dollar Gap

The considerable recovery in the open market has significantly reduced the gap between the rupee-dollar exchange rates in the interbank and open markets. This convergence promotes stability and fosters investor confidence in the Pakistani currency.

  1. Revival of IMF Loan Programme

Experts previously predicted a further depreciation of the rupee, estimating a decline of 5-10% to Rs300-310/$ in the interbank market. This depreciation was anticipated to narrow the gap between the two markets, aligning them before the imminent revival of the IMF loan programme, which is set to expire on June 30, 2023. The recent recovery may alleviate the need for such a significant depreciation, reducing the strain on the economy.

  1. Foreign Exchange Reserves and Debt Repayments

The Pakistani economy has been grappling with dwindling foreign exchange reserves, which currently stand at a critically low level of $4.2 billion. Furthermore, the country is scheduled to repay foreign debt amounting to $3.7 billion in June alone. These factors have heightened the risk of defaulting on international payments after June 2023, should the IMF programme remain stagnant.

Conclusion

The Pakistani currency’s impressive recovery of 5.5% in a single day, reaching a one-week high against the US dollar, marks a significant turning point. The central bank’s decision to allow commercial banks to purchase US dollars from the interbank market for credit card settlements played a vital role in driving this recovery. The narrowing gap between the rupee-dollar exchange rates in the interbank and open markets is a positive development, contributing to overall economic stability. However, challenges remain, including the need to replenish foreign exchange reserves and meet looming debt repayments. The upcoming revival of the IMF loan programme will play a crucial role in determining the future trajectory of the Pakistani economy.

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