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This week's move by Pakistan's central bank - State Bank of Pakistan - to ease pressure on growing demand for the US dollar, says much about the trends surrounding the Pakistani rupee.
In one of its latest moves this week, the state bank slashed the special cash reserve (CSR) requirement for foreign exchange deposits with banks to five per cent from 15 per cent, aiming to reduce the pressure driven by demand for dollars. One explanation for the demand has been the extent to which there has been a steep rise in global crude oil prices which in turn has mounted pressure on the Pakistani rupee.
For many analysts, the demand for the dollar is surprising as the US currency remains under pressure around the world. Speculation about revaluation of the UAE dirham against the US dollar reduced the exchange rate for the US currency in the UAE market.
By contrast in Pakistan, the US dollar posted a modest gain in the past few weeks, driven mainly by rising demand from importers. This trend became visible just when Pakistan witnessed concern over the future of investments as well as remittances from expatriate Pakistanis, at a time of political uncertainty in the country.
Other important factors include some signs of a relative economic slowdown after months of growing political uncertainty within Pakistan.
For the moment, the future of the Pakistani rupee does not appear to be in trouble. That is largely because the rupee is backed by other important variables including the support of at least $16 billion in liquid foreign currency reserves that are enough to finance seven to eight months of imports.
While some of the numbers for the economy such as new equity and direct investments may appear to be under stress, there are other aspects to the Pakistani economy that do not appear to be anywhere near a similar level of prospective turmoil.
Pakistan's overall economic growth rate this year may be sluggish but that is essentially by comparison to the period of strong economic recovery in the past couple of years. The sluggishness may in large part be attributed to the effect of this years' rising oil prices which have made life difficult for economies such as Pakistan which depend largely on imports.
However, the sector where economic output this year may tend to sustain itself is agriculture, which is the direct or indirect means of subsistence for more than two-thirds of Pakistan's population of 165 million.
Pakistan's rural dwellers remain unaffected by the drop or rise in the exchange rate of the rupee.
While many people in rural areas have suffered directly or indirectly from the consequences of this years' oil price situation, there are others who have been the beneficiaries from the agricultural sector.
In the short term, the shaken confidence surrounding Pakistan may well lead to a fall in the rupee, especially in the midst of political turbulence. In the next few months as elections in Pakistan produce a new political dispensation for the country, there is bound to be uncertainty which may affect a host of areas including the rupee.
But as Pakistan emerges from this transition period, long term investors will be looking at a combination of factors tied to the fundamentals of the economy as well as the future political orders, before they decide how they are going to look at the country's future trends.
The writer is a journalist based in Pakistan.
The sector where economic output this year may tend to sustain itself is agriculture, which is the direct or indirect means of subsistence for more than two-thirds of Pakistan's population.
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