HomeBusinessPakistan’s Strengthening Currency and A Tale of Soaring Inflation

Pakistan’s Strengthening Currency and A Tale of Soaring Inflation

After a series of ups and downs, the Pakistani Rupee appreciated against dollar, representing one of the most significant gains in recent history. Apparently, right now but how long?

The Pakistani government is cognizant of the issue and is offering tax exemptions and other incentives to attract foreign investment. When Pakistanis observe the recent appreciation of the Pakistani Rupee against the US Dollar with a sense of pride, it is a stark reminder that economic difficulties persist.

Nevertheless, it is uncertain whether these measures will be persuasive enough to convince multinational corporations to continue operations in Pakistan. Concerns were also expressed regarding Pakistan’s foreign exchange reserves, which were particularly low in July and August due to the devaluation of the rupee during that time. While the value of the rupee had risen to Rs307 at the beginning of September, it has since begun to recover, appreciating by 7.5% from its lowest point. According to the most recent data, the nation’s foreign exchange reserves comprise $13,03 billion, of which $5.42 billion are held by commercial institutions. Companies are optimistic despite the rising operating costs associated with profit repatriation, due to the strengthening rupee in September and Pakistan’s development potential due to its accelerated urbanization and young population. In Pakistan, the destiny of multinational corporations will likely be determined by the government’s efforts to resolve these issues.

While the Pakistan Armed Forces are frequently in the spotlight for their role in the nation’s sociopolitical landscape, they are also involved in financial matters, particularly money exchange corporations. The previous month, speculative demand drove the Pakistani Rupee to a peak of 330 against the US Dollar, prompting a nationwide crackdown on these firms. Rapid reforms in exchange companies and the foreign exchange market led to the Rupee’s remarkable recovery, garnering it a place among the best-performing currencies in the world.

The PKR/USD exchange rate rose by 6% in September 2023, according to a report by JS Global, making it one of the most significant increases in Pakistan’s history. However, the elation of a strong currency is short-lived when the dismal reality of a rising cost of living is considered. The astounding 31.4% year-over-year increase in September’s inflation rate was primarily due to the low base effect. The persistent expansion of core inflation is a source of genuine concern for the average Pakistani.

Multinational corporations operating in Pakistan are confronted with a significant obstacle: the difficulty of repatriating their profits due to a grievous lack of U.S. dollars in the country. According to a recent report by Bloomberg, this issue, which began earlier this year, has caused between one and two billion dollars’ worth of earnings to be trapped in Pakistani banks, affecting companies such as Nestlé, Unilever, and Philip Morris.

Companies are confronted with the dilemma of how to access their hard-earned profits from Pakistan due to the severe dollar shortage. A considerable quantity of these firms’ earnings have remained inactive in the nation’s banking system for nearly 18 months. Philip Goh, regional vice president for Asia Pacific at the International Air Transport Association, told Bloomberg that the situation has improved slightly, with an outflow of $47 million recorded in August. However, the problem persists and continues to impede the repatriation of funds by international airlines and businesses.

The rigorous application procedure for currency repatriation in Pakistan is one of the most significant obstacles confronted by these businesses. To initiate the repatriation procedure, companies must provide an auditor’s certification confirming the amount to be remitted. As a result, enterprises are required to endure monthly audits, rather than the standard annual audit. This not only increases their operating expenses but also delays the repatriation of profits.

The dollar scarcity problem has been exacerbated by Pakistan’s economic difficulties, which include the fluctuating value of the rupee and high inflation. In response, businesses are searching out banks with access to US currencies, investing their proceeds in government securities, and decreasing their reliance on imports. However, it is possible that these efforts will not be sufficient to mitigate the difficulties posed by the dollar shortage. Some multinational corporations are considering more drastic measures, including the possibility of withdrawing from Pakistan entirely. Philip Goh suggested, “Over time, if conditions persist in a country that make the economics of operation unsustainable, it is reasonable to expect airlines to consider deploying their aircraft assets to better use elsewhere.”

Despite the Rupee’s gains, Amreen Soorani, head of research at JS Global, highlighted this alarming trend, indicating that the inflation crisis persists. The recent appreciation of the rupee did provide some respite, reducing the price of petroleum and oil products (POL) by approximately Rs. 10 per liter. During this downward trend, the correlation between POL prices and food prices may be less pronounced. In addition, an expected increase in petroleum prices in November 2023 will likely contribute to the monthly inflation rate.

Sometimes, the fixation on exchange rates can detract from more pressing economic issues. Recent gains in the Rupee may be temporary unless Pakistan’s foreign exchange reserves and economic fundamentals undergo substantial change. The Afghani, the currency of neighboring Afghanistan, appreciated significantly, primarily due to humanitarian aid inflows, the disruption of which could have dire consequences. In a similar manner, Sri Lanka’s currency experienced a roller coaster journey in a matter of weeks, illustrating the volatility that can affect emergent markets.

The government of Pakistan is confronted with enormous fiscal deficits. Yousuf Farooq, Director of Research at Chase Securities, explains that the central bank is financing these deficits through frequent PKR liquidity injections. He noted that the government is borrowing from local banks to close this budget imbalance, prompting the State Bank of Pakistan (SBP) to infuse funds through Open Market Operations, thereby increasing the money supply.

The sustained expansion of the money supply has resulted in an excess of rupees relative to the supply of dollars, exerting downward pressure on the exchange rate. In light of these obstacles, it becomes essential to enable the currency to follow its natural path and reduce volatility. While investors can adjust to currency depreciation, frequent fluctuations unnerve them and can impede Pakistan’s Foreign Direct Investment (FDI) goals.

While it is appropriate to celebrate the recent strength of the rupee, it is equally important to address the pressing issue of inflation. Achieving a balanced economic environment will necessitate not only a strong currency, but also effective price control measures to ensure prosperity for all Pakistanis.

The views expressed in this article are the author’s own and do not necessarily reflect Coverpage’s editorial stance

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