Dollar shortage to keep rupee under pressure in open market

KARACHI: The rupee is expected to trade range-bound next week in the interbank market as the currency rates appear to be kept in check by administrative measures. However, open market dollar prices are anticipated to remain under pressure, according to traders and analysts.

The domestic currency fluctuated during the week in the interbank market, falling to 287.15 per dollar on Tuesday before rising to 285.15 by the end of the week.

Default risks are rising as Pakistan's economic position worsens day by day and its foreign exchange reserves run out. Even though the country is making desperate attempts to resume the stalled $6.5 billion bailout with the IMF, the chances are dwindling every day, primarily because the current programme is set to end on June 30.

“Due to import curbs, the demand for dollars from importers is likely to remain regular. In the upcoming week, we do not see the rupee breaking beyond the 288 level versus the dollar [in interbank market],” said a forex trader.

“However, due to a lack of dollars and increased demand, the rupee appears to be weaker in the open market,” the trader added. On Friday, the rupee's value versus the dollar dropped to an all-time low of 310 in the open market. In relation to the dollar, it decreased by 5 rupees during the outgoing week. The exchange rate difference between open and interbank markets swelled to around 25 rupees, which could encourage overseas Pakistani workers to use illegal means to send money home.

In the week ending May 19, Pakistan’s foreign exchange reserves, a key sign of economic health, fell by $206 million to $9.7 billion. The State Bank of Pakistan's reserves decreased by $119 million to $4.2 billion.

Particularly, reserves held by commercial banks fell by $88 million to $5.5 billion, reflecting an outflow of wealth.

“While the interbank still looks to be range bound, grey market rates are poised to go up further as much of the non-formal imports are being settled through that market,” said Tresmark in a weekly note.

“The political upheaval seems to be reaching a crescendo. As seen from other precedents like Sri Lanka, lowering of political temperature will matter on the economy. Inflation (CPI) for May is expected to rise to about 39 percent but will start easing off from there due to the high base effect and softening of global commodities,” it said.

Ishaq Dar, the country's finance minister, met with Donald Bloom, the US ambassador, for the second time in two months to influence the IMF. Dar reaffirmed that Pakistan would not default.

Pakistan is facing a significant debt repayment of $2.3 billion in June.

The country is relying on China's assistance to rollover the debt, although it is anticipated that a portion of the debt will still need to be repaid and will be received back in a few days/weeks, according to analysts.