Dollar enters the nervous nineties

It’s good news for exporters, bad news for everyone else. Reaching record high levels, the Pakistani Rupee – US Dollar exchange rate has breached the 90 mark for the first time in history, recording 5.3 per cent depreciation during the 5MFY12. Now that’s not all that bad, proviso your income is denominated in the greenback. Exporters for example, benefit from a depreciating rupee as a fall supplements their local currency reported top-line, invariably translating into fattened profitability. But what about importers, especially of the oil & gas breed? Surely, a depreciating currency would pose supply-side pressures; a real pain if demand dynamics do not allow for cost pass-through. But here is where the trouble begins. The US Dollar is all set to hit a maiden century. There is little doubt of that happening so the only question that remains is when. Will Sachin Tendulkar get his elusive 100th hundred before the Dollar reaches the century mark? Perhaps yes, but another dismal tour for the little master and the race is on.
Power, or the lack of it, is a key issue of which each of us is reminded of politely by sporadic load shedding and outages. It seems now that a sequel to the horrid episode seen in the summers is about to restart again. The pertinent question to ask is as to why have there been no (or little) outages thus far, given that an estimated 3,000MW shortfall in hydro power generation capacity was expected this winter? That’s only because the gas supplies have been re-routed from industrial usage to IPPs, household and CNG consumption. Surely we cannot afford to burn stoves at the expense of cutting off the lifeline of our income generating sources. Henceforth, gas supply is expected to be restored to the industry by January 2012, naturally coming at the expense of the amount supplied to power producers and used in homes.
This holds particular significance to the way the Rupee is expected to behave in the coming few months, as it has a direct impact on the country’s trade balance. Though load shedding is inevitable, a greater reliance on oil is likely to emerge shortly. Oil as a rule swells imports and coupled with consistently rising prices of crude in the international market, considerable strain on the import bills can be expected. Our currency’s relatively strong performance in FY11 was supported by a positive current account balance without too much of a drain on the financial account. This led to a Balance of Payment surplus of $2.50b last year. On the flip side, data reveals a shrinking trend in volumetric exports YTD as production dwindled (guess… no gas) as well as remittances – the hero till last year – peaking out in August owing to the Eid effect. Meanwhile, imports have already surged 20 per cent on the whole, enough to cause the trade balance to plunge to $9.06b so far since July. It is hard to see this improving in the coming months simply as it would be virtually impossible to control the burgeoning import bill of oil. Greater demand for Dollar to make these payments would put strain on our currency, going forward.
Then there is the financial account. To start off with, an IMF repayment of $1.40b looms around February as a first stop. The country has to repay around $9.34b by FY16, of which the bulk of the repayments are concentrated in the FY13-FY14 period, according to the repayment schedule released by the SBP. Nevertheless, Pakistan would be requiring on average $2.5b per year. The sources of such funds are unclear, but the more important concern is the exhaustive effect debt repayment will have on foreign exchange reserves. An absence of official inflows given the halt in IMF loan tranches and foreign investment is likely to keep the financial account on weak footing, if not cause further deterioration.
All aspects point to more currency depreciation in the coming months on the basis of simple demand and supply dynamics in favor of the greenback. To me the measures taken by SBP on the forward cover facility against private loans and imports appear good to the point of limiting undue market exposure through speculator activity, but inherently seem to carry the air of rising dollar expectations. Will the Dollar ‘march’ on towards three figures, or will it stagger in the nervous nineties for a while? Strictly a personal opinion, my bet is on the former.

The writer is a financial
analyst and freelance journalist