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Why is the Pakistani rupee depreciating against the dollar?

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Stakeholders are worried that the rupee’s decline to new lows would expose Pakistanis to another wave of inflationary effects that will disproportionately affect the lower and middle classes.

The sharp devaluation of the local currency, which has lost approximately 20% this year and is among the worst performers in the world, would have an adverse effect on every area of the economy.

The value of the rupee has fluctuated in the past, and it will continue to do so in the future, but this time the curve has been in an upward trend for quite some time.

Ankur Shukla and Abhishek Gupta, two economists, have summarised the causes of the Pakistani rupee’s depreciation in a report published on Bloomberg Economics.

The International Monetary Fund (IMF) bailout is necessary for Pakistan to avoid default in the fiscal year beginning in July, according to analysts, but there is an increasing possibility that it won’t be provided. As a result, the capital is reportedly leaving Pakistan. Since the aid has been stagnant since November, they surmised that political upheaval was definitely one of the causes for the Fund’s stumbling.

They also discussed how political unrest has affected the currency, pointing out that since Pakistan Tehreek-e-Insaf (PTI) Chairman Imran Khan was removed as prime minister following a no-confidence vote, the country’s leadership has been insecure.

They stated that “Khan’s arrest this month has escalated the face-off between him and the government, as well as the army,” and cited the fact that the rupee hit a record low of 299 to the dollar after Khan was imprisoned but recovered its losses and stabilised at 285 following his release.

The rupee is expected to fall by another 20%, according to some economists, who are raising alarms about a catastrophic plunge. The currency will probably depreciate much further, according to both economists, if Khan and the government continue to argue and if the IMF decides against lending money.

According to Adil Ghaffar, CEO of Premier Financial Services Pvt in Karachi, if certain conditions arise in June, the rupee might go as low as 350 to the dollar.

Farooq Pasha, an economist in Karachi, stated that “the rupee trajectory remains subject to considerable uncertainty as market sentiment is fragile,” adding that politics would continue to be the biggest risk in the near-term until the elections.

Bond investors are also becoming more anxious as their required premium yield to hold Pakistani dollar bonds over US Treasury securities has increased by more than 35% points this month, setting a record.

Dollar-denominated bonds issued by Pakistan are now trading at distressed prices; 2031 notes are quoted at roughly 34 cents on the dollar.

Despite severe limitations, the nation’s dollar reserves, which were at $4.3 billion in mid-May, are insufficient to fund even one month’s worth of imports.

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