Rupee plunges to new low against dollar for seventh consecutive day

KARACHI: The rupee failed to withstand the growing pressure from the US dollar and lost a further 140 paise in the interbank market on Wednesday, plunging to a new low for a seventh straight session.

The rupee fell 0.46 percent to 304.45 against the dollar. The shaky currency sank to a level of 327 against the dollar in the open market. This means that the difference between the interbank and open market rates has risen to 7.4 percent.

According to rates released by the Exchange Companies Association of Pakistan (ECAP), the local unit was traded at 319.50 for selling versus the dollar, down 150 paise from the previous session.

The major foreign exchange market is the interbank market, but it is still subject to the International Monetary Fund's (IMF) requirements, such as maintaining a 1.25 percent difference between official and open market rates. As a result, the interbank market is chasing the open market, which has become increasingly volatile.

The demand for dollars has surged as import restrictions have been eased. The rupee has depreciated by around 6 percent this month.

Dr Khaqan Najeeb, the former advisor to the Ministry of Finance, said that when Pakistan reached an agreement with the IMF, the general expectation was that Pakistan's currency would stabilize. However, there were some factors that the general commentators did not consider carefully.

He said that Pakistan had to open up its imports, which is why you could see imports rising as agreed with the Fund. Pakistan's exports had slowed down due to the global slowdown, as well as exporters having less raw material and facing import constraints.

Pakistan's current account deficit in July was $809 million, which was caused by a shortfall of remittances of about 19 percent along with rising imports.

"All of this has kept the pressure on Pakistan's rupee, along with the agreement that the 1.25% interbank and kerb market difference would be maintained," Najeeb said.

He added that this is an innovative instrument used by the Fund in the sense that the interbank and the kerb market are two different types of markets with different depths and with different players. So the interbank is chasing a market which is a much smaller market, the kerb market, and it is largely driven by the sentiment of the dollar being the store of value. "All of these factors have been seen in the adjustment of the rupee over the last month or so," he explained.

Najeeb said that the wisest course of action in this situation is for Pakistan to arrange for US dollar inflows from its bilateral and multilateral allies. "In the short term, very clearly the dollar liquidity crunch that the country has been stuck in for a long time has to be removed."

The flows of the multilaterals, the flows of the Geneva pledges, the flows of the commercial banks, the kind of $5 billion that need to be refinanced from the commercial all have to come through, he added.

"On the other side, some foreign direct investments, some privatization in the next to nine months has to happen. I think also what is due is a policy statement from the authorities about the kind of inflows and that the $28.4 billion financing required this year is fully available as discussed with the IMF, which should give some support of course in the long term."

"It's all about exports and you know taking our export to GDP ratio near 12 percent which will create enough dollar liquidity in the country and stability," Najeeb said.

According to ECAP General Secretary Zafar Paracha, certain traders were quoting the rupee at 327 per dollar. "The dollar is out of control, and neither the central bank nor the Ministry of Finance have made any verbal statements that could help boost investor confidence in the currency," Paracha said.

"Although the illegal hawala/hundi business of foreign exchange companies has grown to be quite lucrative, the activity of the licensed and authorized exchange enterprises has been declining daily. The government must take action to stop the illegal money changers, but it will be ineffective because hawala, hundi, and dollar smuggling are so common," Paracha added.