Rupee sinks to all-time low of Rs299/dollar in interbank market

KARACHI: Pakistan’s rupee sank to a record low on Tuesday owing to increased demand for dollars following the relaxation of import restrictions and rising risks associated with financing the country’s current account deficit.

In the interbank market, the currency fell 1.88 rupees or 0.63 percent to 299.01 per dollar, according to data from the central bank. The last record close was in May at 298.93 per dollar.

The local unit fell by 2 rupees in the open market versus the dollar. The rupee was trading for 306 against the dollar down from 304 on Monday, the rates provided by the Exchange Companies Association of Pakistan (ECAP) showed. Some traders quoted even higher exchange rates for the rupee, between 309 and 313 per dollar.

The pressure on the rupee, according to Taurus Securities head of research Mustafa Mustansir, is primarily caused by a variety of factors: political unrest has exacerbated uncertainty, while a backlog of imports after import restrictions were lifted has increased the USD requirement. The US dollar is also strengthening against the major currencies.

“The CAD [current account deficit] figures have also caused some alarm over future external outlook and funding requirements,” Mustansir added.

“Some form of hoarding has also started as the differential between interbank and open market rates have gone up.”

Import financing curbs were put in place by Pakistan starting in 2022 to stop the drain on its dwindling foreign exchange reserves. As a requirement of a $3 billion International Monetary Fund bailout package to support the crisis-hit economy, those limits had to be lifted starting in June this year.

The IMF’s demand for a market-based exchange rate in order to obtain financial support also contributed to the currency’s weakness. Pakistan’s currency has had the worst performance in Asia, depreciating by 4.1 percent so far this month and 24.2 percent so far in 2023, according to data from JS Global.

Concerns about the country’s deteriorating balance of payments position also hurt the rupee. After the nation’s current account swung to a monthly deficit of $809 million in July after posting a surplus for four months, worries about a wider current account deficit grew, putting greater pressure on the local unit.

Analysts predict that as imports rise, made worse by higher global oil prices, and exports and remittances decline, the current account gap will widen, depressing the rupee.

The current account shortfall fell to 0.7 percent of GDP in FY2023 from 4.7 percent in the previous year.

“The CAD could widen more than we expect, given continued reports of import backlogs, the dependence of manufacturing sector on foreign inputs, and reconstruction needs after last year’s floods,” said Fitch Ratings in a report released last month.

“Nevertheless, currency depreciation could limit the rise, as the authorities intend for imports to be financed through banks, without recourse to official reserves. Remittance inflows could also recover after partly switching to unofficial channels to benefit from more favourable parallel market exchange rates,” it added.

“The authorities expect USD25 billion in gross new external financing in FY24, against USD15 billion in public debt maturities, including USD1 billion in bonds and USD3.6 billion to multilateral creditors,” it noted.

However, the State Bank of Pakistan expects the country will repay $24.5 billion in foreign debt. This includes principal repayment of about $21 billion and interest payments of $3.3 billion. Out of the $21 billion principal repayments, the central bank expects a rollover of around $11.3 billion.

The central bank’s foreign exchange reserves currently stand at $8 billion.

Malik Bostan, chairman of the ECAP, said the pressure on the open market is coming from the interbank market.

There was a limited degree of currency speculation because the previous PDM government had some control over banks, Bostan said. The movement of the rupee at this time under the caretaker government is solely determined by supply and demand forces, he noted.

“The rupee’s slide was fueled by worries that it will surpass the 300 mark per dollar in the coming session. However, I anticipate that the rupee will begin to recover in the coming days, therefore, I urge people not to engage in panic dollar purchases. We are keeping a careful eye on the currency rate,” Bostan said.

“We are making sure that the difference in exchange rates between the two markets doesn’t go over 2 percent.”

The open market (informal market) is driving the formal market (interbank market), which is excessively weakening the PKR, said Khurram Schehzad, the CEO of Alpha Beta Core. He claimed that the policy of pursuing open market parity (with a 1.25 percent premium) was flawed and difficult to sustain.