Pak Rupee, as per IMF, was overvalued by as much as 20 per cent in 2017. The currency was then held around at Rs.105/$. Nonetheless, the currency started depreciating by November 2017 and reached Rs.124/$ by July 2018, which is a depreciation of 15 per cent. After the new regime took over reigns in August 2018 the Rupee depreciated further to reach Rs.147/$ by May 2019, which is a further 15.6 per cent depreciation. Thus, in two years the currency had depreciated by 28.5 per cent. The total depreciation had covered the overvalued part of the currency which was the concern of the IMF two years ago.
The Rupee again depreciated to Rs.163/$, that is by 9.8 per cent depreciation in June 2019, adjusted somewhat in the months ahead only to be on the depreciation course again, reaching the level of Rs.168/$ on August 26, 2020. Nevertheless, from November 2017 to February 2020, the rupee had depreciated by 32 per cent.
Let’s look at the appreciation of rupee during the last three months. Several reasons are being associated to the increase in the value of rupee against all the major foreign currencies. The reasons discussed in different webinars and newspaper articles are (i) deferment on repayment of foreign loans (ii) relief aid (iii) exports registered higher growth than imports (iv) increase in remittances (v) current account surplus (vi) saving in forex spending on; foreign tours, foreign education, Umrah and Hajj. It is being argued that these factors together have led to increase in forex reserves. The availability of greater foreign reserves has led the appreciation of Rupee.
Some increase in foreign reserves notwithstanding, many apprehends that the appreciation may not be sustainable. Their reasons include historical trend of the external current account and the consequent historical trend of the Rupee.
During July-September 2020 overseas Pakistanis remitted $7.1. These were 31 per cent ($1.69 billion) higher than the corresponding period of last year, thus contributing more to foreign reserves. Analysts argue that upward trajectory of the remittances may not be sustainable as the increase could be owed to Covid specific factors.
Interest rate and inflation are vital in determining the exchange rate. However, during the last three months, interest rate has not changed. Whereas, inflation first decreased due to lower demand effect and then increased due to supply effect (cost push). Overall, inflation in Pakistan with respect rest of world has increased in the last three months. Increasing the inflation differential would have affected exchange rate negatively (depreciation) to maintain the competitiveness of exports. On the contrary, the exchange rate appreciated.
Exports as well as imports registered a negative growth rate when compared to corresponding period of last year and the trade deficit increased. It has increased relative to corresponding period of last year. Thus the trend of trade deficit also does not explain the appreciation in rupee since August 2020.
Combining all the effects that caused an increase in foreign exchange reserves, we can safely conclude that increase in remittances, deferment of loan repayment and relief aid may have contributed positively to the appreciation of exchange rate. A comparison between the foreign exchange reserves position in August 2020 ($19.91 billion) and November 13, 2020 ($20.08 billion) does not explain the appreciation in exchange rate.
The depreciation spike in Pak Rupee due to COVID panic in March 2020 can be attributed to overshooting of exchange rate. It was adjusted in the next two months. The recent appreciation is partly associated with the downward adjustment of excessive overshooting. Another explanation of appreciation can be the greater availability of foreign exchange due to non-depletion of forex reserves and expected increase due to higher remittances.