Amid a nerve-racking political instability that has been stalking the country for months now, the sharp fall in the value of rupee against the American dollar last week does not only paint a bleak picture of the country’s economy, it is surely going to trigger a domino effect on all essential commodities.
With the federal government struggling with depleting foreign exchange reserves, rising cost of living and protracted political uncertainty, the rupee plunged by Rs24.54 – 9.61% – in a single day to an all-time low at Rs255.43 against the US dollar in the interbank market. By the day, its exchange rate is over Rs 262.
Financial market experts and currency dealers that the sharp follows hot on the heels of the government’s decision to end its control over the dollar-rupee exchange rate as part of the set of conditionalities attached by the International Monetary Fund (IMF) to a proposed $6.5 billion bailout package for the country.
The IMF has set conditions to Pakistan to implement a market-based exchange rate, lift restrictions on imports, increase taxes and electricity price. So far, the government has not yet taken any of these measures and is waiting for a formal engagement with the global lender before taking these actions.
The economic experts have already been projecting a free fall of the rupee against the greenback both in the open and in the interbank markets. The currency of a country devalues when its government is following a floating exchange rate system, according to the experts. They point to a looming crisis of default and appear right to say that the depreciation of rupee, which is already ranked among the worst performing currencies of the world, will have grave consequences for the millions of the poor, who are increasingly losing their purchasing power to the price spiral to provide the necessities of life to their families.
In sharp contrast, in January 2022, the value of the rupee against the US dollar remained Rs176.75 in the interbank market. In February, the value of the dollar was Rs176.42 and on March 1, it jumped to Rs177.41. In April, the rupee further devalued to Rs184.9 against the dollar. The decline also continued into May when the rupee settled for Rs186.62 against the greenback. In June, the rupee further plunged and settled at Rs196.86 against the dollar. In July, the rupee tumbled again to an all-time low in the open market, trading as high as 250 against the dollar, according to data shared by the Forex Association of Pakistan (FAP).
For a brief period after the government changed its economic wizard, the rupee regained its value, but it proved a temporary respite. When economic czar Ishaq Dar assumed the charge as finance minister in September 2022, he believed that the rupee was artificially undervalued by market forces. Accordingly, the central bank conducted a probe against banks and found 13 banks guilty. Action to this end is yet to be initiated.
Needless to say that the rupee depreciation is going to push the cost of living to a dizzying level that does not bode well for the financial health of the teeming millions of poor masses who are already in the grip of a vicious price spiral and who find it increasingly hard to make both ends meet. The situation is feared to become a major cause of distress in terms of both a fresh wave of price hike and an unfolding economic meltdown.
