CAD threatens rupee stability in coming days

The current account deficit (CAD) may pose a challenge to rupee stability in the coming days, despite record inflows of export receipts and workers’ remittances.

The current account posted an unexpected $1.64 billion in June 2021. The monthly current account deficit deteriorated the full-year balance of payment.

Analysts at Topline Research said the current account deterioration in June 2021 was largely due to an increase in the imports of goods, which recorded a rise of 27 percent MoM, or $1.363 billion, to clock-in at $6.322 billion.

After the higher deficit in June 2021, the analysts are now expecting the current account deficit in the range of $7 billion to $8 billion (2.2 percent to 2.6 per cent of GDP) in 2021-22, compared with the earlier estimate of $4.4 billion for the year.

In the last five years (FY17/21) and 10 years (FY12/FY21), the current account deficit has averaged at $10.2 billion (3.5 per cent of GDP) and $6.9 billion (2.7 percent of GDP) per annum, respectively. Analysts estimated the exchange rate rupee/dollar would be ranging in between 165 and 170 by December 2021.

The Pakistan Businesses Forum (PBF) on Friday alerted the economic managers on once again rising cost of dollar, which will lead to inflation and decreased purchasing power.

In a statement, PBF Vice President Ahmad Jawad said, “We must understand that depreciation of rupee means a burden on the economy. It increases the cost of debt servicing by both the private sector and the government.”

He said that it is high time for the government to control the volatility of rupee against the US dollar, and come up with policy reforms to control depreciation of rupee which is becoming more and more valueless as the industrial revival and economic growth is not possible without stability of local currency. “Sharp depreciation of rupee shows that Pakistan is again moving towards a trade deficit regime, which might jack up the current account deficit yet again,” he warned.

It is pertinent to mention that the Pakistani rupee continued the losing streak against the US dollar on Friday last and shed another Rs0.84 (-0.52 percent) in the interbank. According to the State Bank of Pakistan, the US dollar opened at Rs161.48 and closed at Rs162.32. Within the open market, the rupee was traded at Rs162/163 per dollar. This has been the lowest level of the local currency against the greenback since October 21, 2020.

Pakistani rupee shed Rs2.38 against the US dollar during this two-session week, while depreciation during the fiscal year 2021-22 has been Rs4.78. The local unit has shed Rs2.23 against the US dollar in the current year 2021.

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