Pressure mounts for rupee devaluation as exports, remittances fall

KARACHI:  The twin exports and remittances woes reflect a growing clamor in the trade circles for a weaker rupee to help struggling exporters, ensuring the central bank remains under pressure to devalue the currency in the months ahead, analysts said on Friday.

They said the rupee is likely to lose up to four percent of its value against the U.S. dollar in the coming months after largely having been stable so far this year as subdued external inflows will exert a pressure on the forex rate.

The rupee appreciated 0.2 percent against the dollar so far in 2016; although last year the local currency depreciated 3.8 percent.

The currency was trading at 104.65 a dollar on Friday. 

“Falling remittances, at the time of surging non-oil imports and continued depressed demand in the developed world, could complicate the balance of payments and foreign exchange reserve management,” said Zeeshan Afzal, executive director at Insight Securities. “Hence, pressure has started to mount on the exchange rate.”

In July, remittance inflows declined to $1.3 billion compared with $1.663 billion in the same month a year ago.

The economic slowdown in developed world, lay-offs in Gulf Cooperation Council’s countries and tight regulatory regime in the U.S. on cross border fund transfers took a heavy toll on the remittances’ inflows.

Trade deficit widened to $2.1 billion in July as against $1.76 billion in the same month a year earlier owing to decreasing textile exports and increasing machinery and food imports.

The International Monetary Fund (IMF) repeated asked Pakistan to devalue its currency.  The Washington-based lender found the exchange rate was broadly overvalued by 5 percent to 20 percent. The Fund said the overvalued rupee is contributing to the country’s declining exports, along with low commodity prices, power outages and security concerns.

The forex reserves held by the central bank fell to $17.664 billion as of August 5 compared with $18.061 billion a week earlier.

Declining remittances and a likely rebound in the international oil prices don’t bode well for the balance of payments of the country that makes around one-fourth of its total import payments for oil imports.

Afzal said the rupee has been fairly stable over the past 12 months (from August 11 to date), despite the currency depreciation in the region.

During this period, the domestic unit fell 2.7 percent. “By comparison, the Indian currency depreciated 4.5 percent against the dollar and the Sri Lankan rupee 7.6 percent, while Bangladeshi Taka was down just 0.1 percent,” he said. 

Analysts expect the rupee to depreciate two to four percent this year. “We project Pak rupee will decline four percent in the ongoing fiscal year of 2016/17,” said an analyst.

The International Monetary Fund has already expressed its concerns over the overvaluation of the exchange rate. It said the Pakistani rupee was overvalued almost 20 percent.

Afzal said international commodity prices and financial inflows will set the movement of Pak rupee.

Analysts said the rupee devaluation is necessary to give a boost to exports.

“The rupee appreciation as implied by the SBP’s (State Bank of Pakistan) real effective exchange rate has rendered exports uncompetitive in the global markets and imports cheaper, causing unusual widening of the trade deficit,” said Fatiq Bin Khursheed, an analyst at Optimus capital management. “We believe the rupee depreciation is crucial to providing some boost to exports and curtailing non-oil imports in order to provide some support to the current account.”