Rupee nosedives to 118 against mighty dollar amid economic strains

• SBP says devaluation was triggered by payment pressures building within the market

LAHORE: The rupee Tuesday depreciated Rs7.40 against the US dollar ($) after opening at Rs114.00 in ready session, and went as high as Rs118.00 in the inter-bank market compared to its closing rate of Rs110.60 on Monday, before settling at 115.00 after revaluation rate by State Bank of Pakistan (SBP).

A statement issued by the central bank [SBP], however, said that the Pakistani Rupee (PKR)-US$ exchange rate in the interbank market closed at Rs115 and witnessed an intra-day high and low of Rs116.25 and Rs110.60, respectively.

However, the rupee closed at Rs117 against the dollar in the open market.

The statement further said that “the country’s external balance of payments position, however, is under pressure due to the large import bill. This has resulted in a widening of current account deficit which has translated into a demand-supply gap of foreign exchange. This adjustment in exchange rate remains broadly aligned with the evolving fundamentals on the external front.”

Also, the central bank stated, “Exchange rate movements will continue to reflect the demand-supply conditions in the foreign exchange market. And it will continue to closely monitor the foreign exchange markets, and stands ready to intervene to curb the emergence of speculative pressures.”  There was uncertainty in the currency markets, as the banks remained tight-lipped.

A source told Pakistan Today that trading had been ceased due to massive fluctuation in inter-bank rates. In response to Reuters, SBP’s Qamar said it was triggered by “some payment pressures which are building within the market”, and added that the central bank would be “observing the market where it is moving towards.”

While the SBP held the rising demand for dollars responsible for the devaluation, the forex dealers seemed reluctant to accept this argument.

Exchange Companies Association General Secretary Zafar Paracha claimed that foreign loans, the government’s unannounced commitments to international bodies, and corruption were responsible for the lower value of the rupee.

Criticising the drop in the value of the rupee, he said that it would pave the way for inflation, lesser foreign investment and the use of illegal means for transferring money.

He demanded the government withdraw the increase in the dollar rate and asked authorities to take traders into confidence before making such decisions.

This appears to be currency devaluation by SBP, traders said, the second since December last year.

In December 2017, similar volatility was witnessed when SBP chose not to intervene in the market and let the rupee find its value. Tuesday’s depreciation was a repeat of the same inaction on part of the central bank under Ishaq Dar that would release dollars into the market that usually would relieve supply-side pressure.

With reserves now significantly down from December levels and SBP’s more conservative policy of minimal intervention in the FX market, experts say that the frequency of such events to increase is inevitable.

Earlier, it was reported that the rupee had depreciated by Rs4.5 in inter-bank market to Rs115, and follows calls from international lending and credit rating agencies to let the currency devalue to enhance export competitiveness.

Commenting on the current situation, Capital Stake Director Research Maha Jafer Butt told Pakistan Today that despite a nearly 5 per cent depreciation of the rupee in December, multiple signals indicated that pressure on the currency would continue. “An IMF report released earlier this month also stressed on the need for ‘greater exchange rate flexibility on a more permanent basis’ to preserve external buffers and international competitiveness,” she added.

She further said, “The previous devaluation of around 5 per cent did not bring significant impacts on the stock market whereby only $19 million – from December 12, 2017, to March 19, 2018 – were injected in the stock market by foreign participants, as compared to around $460 million outflows from the Pakistan market since January 2017.”

“With the current depreciation in the rupee, participants of the stock market would expect the much-awaited increase in foreign buying, leading to a positive overall impact. The textiles, power and software are likely beneficiaries while the auto sector might see an adverse hit,” she said.

Retired banker and Peak Pik CEO Hermond Javed Bhatti told Pakistan Today, “Rupee devaluation will result in inflation including a hike in petroleum prices. It is not ideal, but given the external economic pressures, devaluation will boost exports and aid the balance of payment.” He added, “Apart from making exports more lucrative, with an amnesty scheme on the cards, remittances are likely to surge enhancing investment in the real-estate sector massively.”

He went on to say, “SBP is likely to increase interest rates by 200 basis points in FY19, over the expected 75 basis point hike in FY18, while policy rates are likely to continue the hike leading up to June 2020. This will obviously have a positive impact on the local banking sector as an increase in interest rates leads to rising in banks’ earnings by an approximate ratio of 1 percentage point to 6 per cent rise in earnings.”

“Over the short term, we expect the rupee to find support around the current levels,” said Zoya Ahmed, research analyst at AKD Securities.

“News reports suggest that ‘friendly countries’ may give Pakistan a grant of $2 billion. In addition, an amnesty scheme is also likely this month, according to Adviser to the Prime Minister Miftah Ismail,” Zoya said, adding that these two developments are likely to help stabilise foreign exchange reserves.

“That said, much depends upon timely materialisation of inflows, absence of which can result in additional depreciation over the year, particularly in the backdrop of continued deterioration in the current account deficit,” she said, and added that she expects the rupee-dollar parity to further depreciate by 2.5 per cent in the current calendar year.

Analysts at Topline Securities expect at least 10-15 per cent devaluation during 2018-19 and 2019-20, which is on top of the depreciation of 9 per cent that has already taken place in the current fiscal year. This will take the dollar-rupee parity to around Rs140 by June 2020.

This follows last week’s report of US dollar plunging to a one-month low below of Rs112 in the kerb market on March 14, as it kept on losing steam against a basket of major global currencies.

IMF’s post programme report released last week welcomed the central bank’s decision to permit Pakistani rupee to depreciate against the dollar in early December 2017, but emphasised on the significance of greater exchange rate flexibility on a more permanent basis to enhance competitiveness and safeguard external buffers.

The IMF report added, “Staff advised to unwind the increased government borrowing from the SBP, which would support monetary tightening. Going forward, greater exchange rate flexibility will need to be accompanied by a further adjustment of the policy stance, as well as strengthening of the interest rate-based monetary policy framework with appropriate intermediate and operational monetary policy targets, and a clear limit to FX interventions.”

A United Nations report in early December warned Pakistan’s policy of keeping the rupee stable could become untenable if the US dollar appreciates against other world currencies and possibly erode the country’s foreign exchange reserves.

In a volatile trading session on December 8, the rupee slumped to Rs109.50 per dollar at one point after opening at 105.55. It closed at Rs107 per dollar, according to the SBP, after having mostly traded in a tight range of 104-105 per dollar since December 2015.

This mimicked rupee’s sharp fall on July 5, 2017, both in the interbank and kerb market, when it reached a then 2.5-year high of Rs108.

Albeit timing of rupee depreciation witnessed on Tuesday was a surprise, given most stakeholders were expecting it to be closer to elections, it was, however, widely expected and inevitable given the need to curtail the weakening macros i.e. ballooning current account deficit and a three-year low foreign exchange reserves.

Going forward, this will benefit exporters and deter importers, which is the desired effect. But in the bigger picture, all Pakistanis have now lost 10 per cent of their worth since December, said Pak Kuwait Investment Co AVP Research Adnan Sheikh.

Meanwhile, the Lahore Chamber of Commerce & Industry (LCCI) has demanded of the SBP to control a rapid surge in dollar price through strict measures, otherwise, rupee devaluation will give a big blow to the economy.

“Rupee devaluation would be the last straw on the back of the camel as external debts are already around $89 billion, exports are stagnant, trade deficit is swelling,” LCCI Acting President Khawaja Khawar Rashid, Vice President Zeeshan Khalil and Executive Committee Members said in a statement.

A World Bank (WB) analysis in November 2017 revealed a weaker Pakistani rupee would help external balances with limited economic costs.

WB analysis outlined that there was a significant correlation between the real effective exchange rate (REER) and exports in the medium to long-term. A flexible Pakistani rupee would allow in narrowing the current trade deficit.

In July 2017, Moody’s Investor Service said that the rupee was 20 per cent overvalued and had urged the SBP to show some flexibility and let the PKR depreciate.