SBP mopping up dollars from open market

The economic observers see the central bank mopping up dollars for the cash-strapped government from the open market where the rupee is touching its lowest ebb against the greenback.

The analysts believe that the State Bank by raising dollars from the free market wanted to increase the spread between interbank and open market rates for the US currency. The present situation, they said, had been raising increasing concerns as PKR slid drastically against the USD giving rise to the possibility of a notorious challenge emerging for the economy.

According to analysts at InvestCap Research, the increased volatility in PKR against the greenback had made USD an attractive investment thus magnetising considerable investor interest.

“This along with repayment of IMF loans due is expected to exert further pressure on PKR,” viewed InvestCap analyst Abdul Azeem. He said the massive fall in PKR had been largely led by the repayments of the IMF loans due.

The above mentioned payments were initiated in Jun-12 since the said period PKR had shed its worth by an alarming 10.7 percent up till now. The SBP’s forex reserves have also reduced by 52 percent (USD5.6bn) in the said period.

Thursday, the central bank reported that by Sept 13 the country’s dollar reserves stood at $10.374 billion of which over $5.256 billion belonged to the commercial banks. Moreover, post the new loan arrangement with the IMF, strong pressure had been witnessed to have built up in the local currency as it touched an all time high level of Rs105.85/USD and Rs106/USD on interbank and open market respectively.

During the month (Sep-13) the country has inked an agreement with the IMF for an Extended Fund Facility of USD 6.6 billion to support balance of payment situation. Out of total amount approved, Pakistan has received only USD5 44mn, where receipt of the remaining amount is dependent upon the fulfilment of the terms and condition set by the Fund.

During the remaining period of FY14, the country is liable to repay an amount of USD 2.4 billion to the IMF. However, during FY15 and FY16 USD1.3 billion and USD60 billion respectively is due to be accrued. To Azeem, another growing concern surfacing was that investment in USD was becoming an increasingly lucrative avenue for the investors.

“However, the same presents only short-term gain opportunities for individuals playing its due role in attracting speculators willing to grasp the opportunity welcomingly,” he said. The SBP’s stance to increase interest rates is expected to curb the fluctuation in USD for an investment prospective, the analyst said. “The recent turn of events lead us to believe in the possibility of SBP mopping up dollars from the open market,” Azeem said.

He expected such an act to increase the spread between interbank and open market rates for the greenback. In the absence of any sizeable inflow of USD, expectation of PKR depreciation during FY14 remained high.

Moreover, poor law and order situation coupled with energy crisis can both be classified as major contributors forcing foreign flows to evaporate and affect the country’s exports. However, given the present situation, the balance of payment situation can be supported by privatization of state-owned companies, FDI, 3G Auction, payments from Etisalat, remittances and last but not the least loans from donor agencies.

“Though all these options have their due pros and cons, we continue to expect PKR to remain depressed during FY14 with the likelihood of touching Rs110/USD by the year end,” said the analyst.