- SBP spokesman says market forces driving exchange rate
- Rupee devalued three times against dollar to prop up exports, rein in decline of foreign exchange reserves during FY18
LAHORE: The rupee plunged to a record low of Rs128 against the dollar in the inter-bank market on Monday, as burgeoning trade and current account deficit alongside deteriorating foreign currency reserves continue casting a shadow over the economy.
The rupee started intra-day trading Monday at Rs121.55, shooting up to Rs125.5 and peaking to a high of Rs129.4 in the inter-bank market against the greenback before settling down at Rs128.
It finally settled at 127.9993, according to State Bank of Pakistan’s (SBP) market to market revaluation exchange rates on their website. On a cumulative basis, the rupee has depreciated by around 14 per cent this year and foreign exchange reserves touched their lowest ebb in the last three-and-a-half years.
The rupee had closed at Rs121.55 against the greenback in the inter-bank market on Friday.
According to a press release issued by SBP said “the PKR-US$ exchange rate in the interbank market closed at PKR 128.0 per US$ against the closing level of PKR 121.55 per US$ of the previous day.
This movement in the exchange rates reflects the demand-supply gap of the foreign exchange in the interbank market.”
It added, “SBP is of the view that this adjustment in the exchange rate along with the increased policy rate and other administrative measures, would help contain domestic demand in general, and reduce the imbalances in the country’s external accounts in particular.”
Last month, the SBP had devalued the rupee by 4 per cent against the dollar following the 10 per cent depreciation in December 2017 and March this year.
While speaking to Pakistan Today, Topline Securities Research Director Saad Hashemy said, “This devaluation is a positive signal on the economic front to investors that the much-required steps are being taken to address the burgeoning external account.”
“Pakistan’s external account continues to deteriorate with the external current account deficit (CAD) down during FY18 by higher than expected,” he added.
“CAD is now expected to increase to a whopping US$18.0bn (5.8 per cent of GDP) in FY18 compared to US$12.6bn (4.1 per cent of GDP) last year. This is not sustainable given the current low level of reserves of US$9.5bn, less than 2 months of imports, as of July 6, 2018, we believe. We currently expect the rupee to further devalue to Rs131 by June, 2019,” said Saad.
He further informed that a weaker Pakistani rupee will largely be positive for listed sectors including oil and gas exploration, power (IPP’s), textiles and information technology (IT) due to dollar-denominated revenues.
“On the other hand, auto assemblers, cement and steel could be negatively affected as it could lead to lower margins for autos as devaluation may not be fully passed on, and cement as it would lead to higher imported coal prices. Steel sector’s demand could be negatively impacted due to higher steel product prices,” he said, adding that “we do not expect any major impact on insurance and fertilizer sectors.”
In a comment to Reuters via text message, State Bank of Pakistan Spokesman Abid Qamar said: “Market forces are driving the exchange rate.”
Pakistan’s current account deficit ballooned to $16 billion during the first 11 months (July-May) of the just concluded FY18.
During FY18, rupee had been devalued three times against the dollar to prop up exports and rein in decline of foreign exchange reserves.
Talking to Pakistan Today, Pak Kuwait Investment Co AVP Research Adnan Sheikh said, “Rupee depreciation is a necessary measure to curb imports and reduce consumption in an attempt to limit the outflow of dollars from Pakistan as reserves have been dwindling.”
“Ramifications on the economy would be higher prices mainly of petrol, vehicles and steel items, of which imports make the major component, while increase in prices will have an inflationary impact across all sectors and will also limit consumption,” he added.
On the capital markets, the sectors whose operations are dollar-linked or can substitute imports will benefit from depreciation, while those whose proportion of dollar-based costs outweigh revenues will see their profits contracts,” said Adnan, adding that the financial sector is expected to benefit from interest rate hikes as lending spreads would increase, however, there is a risk of higher defaults and contraction in credit as rates rise sharply.
“Conversely, highly leveraged companies will see their financial charges rise and eat away from profits. Those companies that are relatively debt free, or whose cash and short-term investments are significant, will be better off.”
While speaking to Pakistan Today, former economic adviser and Macroeconomic Insights CEO Sakib Sherani said, “The rupee is reacting to the fact that Pakistan has a net external financing requirement of $12-13 billion. The depreciation is not a devaluation policy per se but a market adjustment to an excess demand for dollars in the inter-bank market via imports etc.”
He added, “The currency will stabilise when either imports are compressed significantly, or the country receives a large dollop of fresh new money from external sources.”
Last week, Pakistan’s imports for FY18 skyrocketed to $61 billion, rising 15.10 per cent against $52.910 billion in the same period of FY17, according to the central bank data.
The country’s exports slightly enhanced by 14 per cent in the last fiscal year to $23.228 billion compared to $20.422 billion in the same period last year.
Exports increased as per market expectations, but the imports are still out of control despite all measures taken by the government. The trade deficit of the country stood at $37.670 billion in FY18 compared to $32.488 billion in the same period of FY17.
In the last decade, the rupee has devalued annually by around 5 per cent.
In mid-April, former finance minister Dr Miftah Ismail, in an interview to Bloomberg TV, said that the rupee had attained its “optimal value” and wouldn’t require further devaluation.
