–Rupee closes at Rs 133.6431 in interbank trading against greenback, declining by 7.542%
–Rupee devaluation, IMF bailout possible reasons behind increase in dollar rate
LAHORE: The rupee weakened by 10.24 per cent against the dollar in the inter-bank market, touching an all-time low of Rs 139 on Tuesday, as the government heads to the International Monetary Fund (IMF) for a bailout.
The rupee eventually closed the day at 133.6431 against the dollar in the interbank market, declining by Rs 9.371 or 7.542 per cent, according to the State Bank of Pakistan (SBP).
Earlier in the day, the rupee shot up to Rs 134 against the dollar before touching a record high of Rs 139, before falling to Rs133 against the greenback. Initially, it depreciated by 8 per cent before shooting up to 10 per cent in interbank trading.
This is the fifth devaluation of the rupee since December 2017, which has seen the local currency losing cumulative 26 per cent of its value against the greenback.
This indicates that the Central Bank has decided to let the local currency depreciate in line with IMF recommendations, which wanted to see the rupee at Rs 145 against the dollar.
The dollars Pakistan will get from the IMF will help it avoid defaulting on foreign payments. But these dollars come with conditions that will lead to higher inflation and more unemployment because the country is heading towards an economic slowdown.
According to the IMF, Pakistani rupee is overvalued while a fast rise in international oil prices is also adding to the country’s problems. In this environment, economic growth will slow down and inflation will rise, the IMF said.
The decrease in the value of rupee will make imports (oil and raw material) more expensive, which will cause inflation. Cutting back on expenses will slow the economy down and lead to fewer jobs or even cut in jobs.
In a statement, SBP Spokesman Abid Qamar said, “The market is aware of the overall macroeconomic conditions and based on those conditions, they are having their own expectations about the exchange rate, so that is driving (the rupee valuations) currently.”
According to an analyst, the interbank market rates for the rupee to a dollar were ranging between Rs137 and Rs139 and the kerb market was quoting its own rates.
This 10 per cent depreciation would translate to a weakening of around Rs 15 to a dollar from the interbank market closing rate of Rs 124.27 on Monday.
The government on Monday decided to officially approach the IMF for a bailout as the KSE-100 index had plummeted 1,328.09 points, continuing a losing spree of six consecutive sessions. The devaluation had been imminent since the rupee had been diminishing in value against the greenback since the start of October.
According to Adnan Sheikh, Pak Kuwait Investment Co AVP research, Pakistan’s imports have been resilient to previous rounds of devaluation, however we are fast approaching the threshold where consumption of unnecessary items will begin to slow. He added, “Petrol prices must be revised upwards as well to Rs 150 per litre since average global gas prices stand around $1.2 per litre whilst in Pakistan, they are $0.8 per litre compared to India where it is $1.15 per litre.”
Adnan said SBP data shows the real effective exchange rate (REER) is overvalued by around 11 per cent. He said to be competitive, it’s usually deemed wise to keep it undervalued by 5-10 per cent, which meant a 15-20 per cent devaluation from the Rs 124 level.
As per Adnan’s assessment, Pakistan would require a 15 to 20 per cent devaluation before going to the IMF, and with the decision to approach the Fund for a bailout taken, further depreciation may be needed considering the new conditions that they may impose.
“Dollar could be trading around Rs 180 by June 2019,” he concluded.
However, the KSE-100 index bounced back on news that Pakistan would be approaching the IMF for a bailout and surged over 900 points in the first hour of intraday trading before falling to 38,316.79 points, an increase of 418.50 points as news of the rupee devaluation sunk in.
Also, adding to the worries was the $628 million decline in foreign exchange reserves of the central bank last week to $8.4 billion, which was the sharpest fall in years leaving the country with import cover of barely 1.5 months.
On Monday, the rupee had plunged to Rs 129.50 against the dollar in the kerb market due to the prevailing economic and political certainty that had gripped the currency and capital markets.
It nosedived by Rs 2.10 against the dollar in the open market, as the currency dealers refused to exchange the greenback in Karachi, according to reports.
On Monday, the interbank market rate of the rupee to a dollar stood at Rs124.27 according to SBP’s market to market revaluation rate sheet.
Consequently, as the supply of dollars dries up in the open market, it will push up demand creating a dearth of the greenback and rupee is expected to nosedive further.
A report published by World Bank on Sunday said despite a modest rebound recently, there was a 10 per cent depreciation compared to the beginning of the year and a 14 per cent depreciation compared to one year before.
According to reports, IMF and Pakistan had disagreed over the exchange rate parity, as the State Bank of Pakistan (SBP) believed the exchange rate of Rs 137 to a US dollar by end of the current financial year 2018-19 would be enough to address the challenges.
According to sources, IMF’s determination was to the contrary and they wanted the rupee to be traded above Rs 145 to a dollar.
Pakistan has been facing a crisis on the external front, with burgeoning trade and current account deficits and depleting foreign exchange reserves.
Pakistan’s gross external financing requirement has been estimated at $22-25 billion for the current financial year FY19.
