The improvement of the rupee-dollar parity by Rs 0.98 on Wednesday from Rs 156.72 per dollar to Rs 155.74 per dollar was mainly because exporters were busy bringing home export proceeds, not because of an increase in exports or a decrease in exports. As the decline was occurring because exporters were anticipating further increases in the value of the rupee, it indicates it was not really happening because of a genuine strengthening of the rupee, but because of an under-valuation of the rupee, which was leading to a readjustment caused by the ordinary laws of supply and demand.
The most worrisome aspect of the current decline is that it might well lead to exporters keeping their proceeds abroad rather than bringing them home and handing them to the State Bank of Pakistan for conversion into rupees. Exporters are allowed to keep proceeds abroad for up to 90 days. Exporters would obviously want as high a parity as possible, so as to earn more rupees. However, there is the import end to consider. A lower rupee-dollar parity may not be sustainable if the demand for fuel imports keeps growing. Another significant increase in the import bill is likely from the food items, where the import of wheat is causing an increase in the international price of wheat. Not only is that driving up the retail price of flour, but it is creating another point of pressure on the government
The improvement in the foreign exchange reserves, it must be mentioned, is mainly because of the release of the tranche of the IMF Extended Fund Facility held up, which does nothing to solve the basic problem of the Pakistani economy, that not enough is being exported to cover the cost of what is being imported. With fuel imports needed to provide extra electricity at the advent of summer, and food imports to end shortages created by horrible decision-making from which ruling-party made money, an improvement in the rupee-dollar parity does not mean a structural improvement in the economy. That would require an improvement in the balance of trade that is not visible yet.
