The drop of rupee continued to around Rs103 against US dollar despite record foreign exchange reserves of around $18.68 billion mainly consisted of borrowed money from IMF, World Bank and other agencies.

The foreign reserves, which have doubled from $8 billion to about $18.5 billion in one and a half year period, have not lifted the local currency value rather it is on declining trend against greenback.

Financial experts are of the view that foreign reserves alone cannot fix the local currency exchange rate with foreign currencies rather import-export gap and inflation rate are the major economic indicators to set the real value of rupee against dollar.

According to latest figures, the State Bank of Pakistan’s held reserves stood at $13.54 billion and of commercial bank at $5.13 billion. The reserves are likely to further increase in a couple of days when country would receive $337 million from the United States under Coalition Support Fund, surging to $19 billion benchmark for the first time.

Forex Association of Pakistan president Malik Bostan said the imposition of 0.6 percent and later 0.3 percent withholding tax on non-filers’ bank transaction also supported dollar buying against rupee that created the dollar demand.

The greenback might go further up if the central bank would not interfere to keep the dollar at Rs103. He said that Forex Association of Pakistan had assured the central bank that dollar would now be traded under Rs 103 rate in cash free market. However, importers have blamed that the government, in connivance with the central bank and forex dealers, have lifted the US dollar artificially just to facilitate exporters.

They argued that dollar was traded at Rs98 some one and half years back when reserves were just $8 billion and now more than 100 percent increase could not control the greenback. Instead local currency is being depreciating on the demand of exporters, they blamed.

Malik Bostan observed that the non-availability of dollars from commercial banks brought the physical shortage of dollar in cash free market and further supported the price hike. He said that SBP has promised to provide dollar to commercial banks to cater the demand of exchange companies. He informed that the up coming Haj season to be started in August is also one of the reasons behind the higher rate of US currency. He said that more than 300,000 pilgrims go for Haj and buy Saudi Riyal, affecting dollar supply indirectly.

According to experts, a currency’s international value over the long term depends on that country’s economic realities. And Pakistan’s economic realities haven’t changed much, they added. According to them, the widening trade deficit is evaporating the advantage of high foreign reserves, as the rupee is not appreciating against dollar.

As per the recently released numbers by Pakistan Bureau of Statistics, Pakistan trade deficit has increased by 10.7pc to $22.1b in FY15. Food products imports increased by 18pc to $5.0b (higher milk import due to record low prices) while machinery imports surged by 15pc to $7.4b (higher power generation machinery). Exports, on the other hand, have declined by 4.9pc to $23.9b.

Despite increase of $2.4 billion in borrowing, reserves grew by only $1.5 billion which shows that already borrowings have financed the deficit, said former finance minister and noted economist Dr Hafiz Pasha, considering this a risky strategy, saying that a decline in export was a cause of concern.

“An overvalued exchange rate had reduced competitiveness of Pakistani exports, as trade deficit has widened by 36pc, he said. He said that growth in home remittances and receipt of coalition support fund, however, alleviated the situation. Dr. Pasha was of the view that foreign exchange reserves increased also because of successful Sukuk bond float loan from the IMF.

He stated that rupee is week against dollar, as most of economic indicators reflected below par performance. A major concern was continued slow growth in large scale manufacturing. One reason was the continued poor state of the power sector, he said. He added that generation almost remains stagnant, and Discos’ losses are high.

So far, it seems to be a case of one step forward two steps back as investment, public and private, is weak; tax collection fall well below the target; and exports have declined in the face of an overvalued exchange rate, he stated. To maintain foreign reserves, the government has taken debt on a substantially high cost, he said.

Dr Pasha urged the government to prepare a new policy in consultation with all stakeholders to effectively control the fast widening trade deficit and to increase exports.

He said that it is a high time that the government should put curbs on unnecessary import of luxurious items. He said that a huge increase in the trade deficit would have dire consequences for the economy of Pakistan therefore all future trade policy initiatives should take a comprehensive view of this problem.

Another noted economist Dr Salman Shah observed that the hopes of a current account surplus in second half of FY15 have faded away. He said that at the same time, the government should also facilitate the exporters and implement all trade facilitations in letter and spirit enshrined in trade and textile policies.

All Pakistan Business Forum president Ibrahim Qureshi said that the economic realities show that the country cannot sustain a high and growing trade deficit therefore the trade development should be enhanced through close coordination with Industry. He said that galloping trade deficit and resultant inflation might dent country’s debt payment capacity that ultimately would not be a happy sign for the overall economy. He feared that the growing trade deficit could increase inflationary pressure as Pakistan has reportedly been importing a number of food items including pulses, wheat, medicines and milk apart from machinery and other items.

Ibrahim Qureshi said that apart from cutting the cost of doing business in Pakistan, the government would have to evolve a long-term strategy to make its products attractive in the global market to increase its exports.

Moreover, the curtailment of productions due to power cuts by the local industries catering to the domestic markets also encouraged imports and contributed to the huge trade deficit therefore the measures should be taken to stem electricity shortage.