Rupee Becomes Asia’s Best Performer as Smuggling Curbed

Rupee appreciation

The Pakistani rupee has become the best-performing currency in Asia so far this fiscal year, according to data from Topline Securities. The rupee has appreciated by 1.7% against the dollar between July 1 and October 9, 2023, while other Asian currencies have depreciated.

The rupee’s appreciation is mainly due to a crackdown on currency smuggling and illegal foreign exchange trade, which has reduced the gap between the interbank and open market rates. The State Bank of Pakistan (SBP) and security forces have taken action to stop black market activity and enforce structural reforms related to foreign exchange companies, exporters selling dollars, and panic selling by hoarders.

The rupee plunged to a record low of 307.1 per dollar on September 5, but since then it has recovered sharply, rising by about 9% in just five weeks. The rupee closed at 281.65 per dollar in the interbank market on Monday. Analysts expect the rupee to surpass the 280 per dollar level in the coming days.

Economic benefits

The rupee’s appreciation has positive implications for Pakistan’s economy, which is already experiencing its worst economic crisis in years. The rupee’s strength will help reduce inflation, lower import costs, improve the current account balance, and ease the debt burden.

The current account deficit, which measures the gap between foreign exchange inflows and outflows, is expected to show a surplus in the first quarter of the fiscal year, thanks to higher remittances, lower oil prices, and improved exports. Remittances are anticipated to come as a pleasant surprise, as they have been increasing despite the COVID-19 pandemic and the closure of the Afghan border.

The closure of the Afghan border has also reduced smuggling, especially of gold, which was the primary means of wealth transfer. The government’s attempts to eliminate the abuse of the Afghan Transit Trade (ATT) have also helped improve the balance of payments.

The rupee’s appreciation will also ease the pressure on the external debt servicing, which amounts to $11.2 billion in the current fiscal year. The government is seeking rollovers from friendly countries like China, Saudi Arabia, and UAE, which have already placed $9 billion deposits with SBP. The government is also hoping to secure a staff-level agreement with the IMF soon, which will unlock another tranche of $1 billion.

Challenges ahead

Despite the rupee’s appreciation, Pakistan still faces many challenges in stabilizing its economy and ensuring its sustainability. The economic fundamentals have not changed significantly, and any further appreciation could create another bubble. The SBP should step in to buy dollars and encourage exporters to sell their proceeds in the interbank market.

The government also needs to implement structural reforms to address the fiscal deficit, improve tax collection, enhance energy sector viability, strengthen SOE governance, and foster a business-friendly environment. The government should also focus on good neighbourliness and regional trade with Afghanistan and India, which could boost economic growth and stability.

The rupee’s appreciation is a welcome development for Pakistan’s economy, but it is not enough to overcome the deep-rooted challenges that the country faces. The government should capitalize on this opportunity and pursue sound policies that will ensure long-term economic prosperity for Pakistan.

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