Will rupee appreciation last?

The ongoing currency volatility is the highlight of the new governments economic management. Indeed, it is a job well done by Mr. Accountant, as the currency has appreciated consistently ever since he claimed that he would pull it back below the 100 mark. The rupee closed below 102 against the greenback yesterday.

Is it the desired outcome for an economy which needs to boost exports for creating employment and curb imports to avert balance-of-payment crises? Yes, it could have been if the currency appreciation would have been sustainable and our exports would have been naturally competitive. But, there are doubts looming over the stability of the currency at these levels whereas our major export-textile-is facing stiff competition from similar economies.

The prime reason for rupee to revert back sharply in the last week is the building up of SBP reserves which are up from the low of $2.84 billion to $3.92 billion in a span of three weeks. Some of the flows like CSF money were well anticipated but the market was surprised by around $700 million jump in reserves in the third week of February. That is probably due to $750 million in aid coming from Saudi Arabia for some military related supports to the Kingdom.

That has changed the sentiments–punters, traders and treasurers are expecting reserves to build up further on account of some negotiations going on with KSA and some GCC countries for deferred oil payments. The government has almost finalized a deal with KSA for six months deferred oil payments for a period of three years, similar deals are envisaged with Kuwait and the UAE.

Together, these measures can give a cushion of over $5 billion in imports payment in next six months and that can be continued for three years. Even, only with Saudis we can save $400-500 million per month in oil import payments for six months and forex reserves to be up by same amount. No wonders, the SBP expects its reserves to reach by $4.7 billion by April end and $6.7 billion by June end (See BR Research article Whats behind rupee appreciation?” published on Feb 18).

This information has changed the market sentiments, thereby creating a domino effect as many who were holding back dollars for months are now offloading them to book the loss, and that has resulted in further appreciation in the currency. Plus, the USD is falling internationally for a host of reasons–the Indian rupee has appreciated by 3-4 percent last week against USD, so Pakistani market is no exception.

But this sudden appreciation in currency without strong macroeconomic fundamentals has all the potential to worsen current account balance and can make currency more volatile. Its a big loss to exporters–if the dollar is down by one rupee, our textile exports lose out Rs12billion per annum, so in the last week potential loss is close to Rs50billion. Soon the strong textile lobby and large vote bank in Faisalabad may approach PML-N leadership to bail them out.

Plus, its going to be windfall for importers to enjoy higher margins by not fully passing on the impact of rupee appreciation. Even if they do pass on the benefit then higher import demand may put a pressure on balance-of-payment.

Mind you, there were talks of having import compression by higher duties on non-essential imports and what is happening is an exact opposite of it. Then, there is less incentive for expatriates to remit when the currency is overvalued. Although, right now people would send more before the rupee falls below 100 but over the medium term remittances can fall.

In a nutshell, Ishaq Dars one point economic management to tame the currency can be counterproductive. He must think along on the repercussions of overvalued currency. Its not far when the lobbies would reach Nawaz Sharifs doors and Dar would be forced not to intervene too much. May one also remind that the IMF is not going to like exporters becoming uncompetitive, which makes one wonder how long will the rupee remain around or below the 100 dollar mark!