The rupee recovering against the dollar after what can safely be called a prolonged decline ought to give some confidence to economic and debt managers because it implies building confidence in the economy while the favourable exchange rate ‘eats up’, so to speak, a portion of the outstanding debt. But it also raises a red flag because if this trend goes on too long, however healthy some people might consider it, it will definitely drive down export earnings by making our products more expensive in the international market. That is why it will worry producers, especially those that rely on foreign exchange movements to make their money in a very competitive environment indeed, especially in the post-Covid scenario.
Yet now that there is confidence in the growth potential of the economy it can and should be hoped that tax revenue will surprise to the upside sometime soon enough. It’s a good thing that remittances continue to be robust and policy makers are still pretty surprised about the real causes for the sudden bulge. But they won’t mind the foreign exchange flowing in whatever the real reasons; be they the necessity of using formal money transfer channels only because of Covid-related restrictions or the fact that a lot of people have lost their jobs and are sending back their life-savings. Still, it is very important to remember that sooner or later this phase, of unusually high remittances, will pass and all the government will be left with are going to be tax receipts and export revenue.
That is why the rupee’s rise should be watched very closely. If indeed GDP gains strength and the economy starts moving in the right direction, then there is also the prospect of high inflation and the central bank raising interest rates and discouraging private sector offtake. It’s also of a little concern that exports didn’t really respond to the collapsing rupee in the manner that was hoped, even though Pakistan recovered faster than most other countries from the lockdown and was therefore able to capture trade markets lost to other manufacturers still in quarantine. Still, all eyes will now be on the growth trajectory and how a resurgent economy breathes life into GDP growth and dilutes the debt to whatever extent it can.
Source: https://dailytimes.com.pk/733748/rupee-recovers/