The Pakistani Rupee’s recent strength against the U.S. dollar has created a complex situation for the government. While exporters fear a loss of competitiveness due to a costlier Rupee, a weaker Dollar could lead to higher import costs and disrupt the trade balance.
The Dollar’s five-month low (Rs. 278.77) worries exporters like Amir Aziz, who face high production costs due to expensive energy and a 22% interest rate. This makes Pakistani exports less competitive in the global market.
Currency dealers like Atif Ahmed warn that a cheaper Dollar could incentivize imports, potentially widening the trade deficit and increasing the current account deficit. Pakistan has recently achieved some success in reducing these deficits.
The caretaker government’s proposal to subsidize electricity for exporters was rejected by the IMF, highlighting Pakistan’s dependence on their financial support.
The high-interest rate curbs inflation but hampers economic growth. Finance Minister Aurangzeb hinted at a gradual cut, but the decision might depend on March inflation, which could rise due to Ramadan.
The upcoming central bank policy announcement on Monday is awaited anxiously by the market, with interest rate decisions impacting both growth and inflation.
Investment Dilemma: While a stable exchange rate hasn’t attracted significant foreign investment, it has instilled confidence in some economic stakeholders and facilitated exporters selling their earnings in Dollars. This Dollar liquidity helps maintain market stability.
The government faces a tough task in navigating these competing interests. They need to find a way to support exports without jeopardizing the trade balance and ensure economic stability through potentially lower interest rates without fueling inflation.
