Rupee devalues 3.9 percent to hit four-year low on import payments

KARACHI: Rupee on Friday hit a four-year low and posted its biggest percentage fall of 3.9 percent in over nine years on panic buying from traders to meet oil import payments, but an apparent central bank’s intervention hauled ‘a sharp devaluation’ of the currency, bankers and dealers said.

The rupee touched an intra-day low of 109.50 to close at 107/dollar in the interbank market, its biggest single-day fall since 2013. The rupee closed at 105.54 on Thursday.

State Bank of Pakistan (SBP) said the current movement in the exchange rate is based on demand and supply of foreign exchange in the interbank market.

“This market-driven adjustment in the exchange rate will contain the imbalance in the external account and sustain higher growth trajectory,” the SBP said in a statement. “The exchange rate will continue to reflect the demand and supply conditions; and SBP stands ready to intervene, in case speculative and/or momentary pressures emerge, for smooth functioning of the foreign exchange markets.”

Analysts said the rupee “devaluation is long overdue”.

“The rupee has been relatively stable since August 2015… (though), the country posted a current account deficit of $12.2 billion or four percent of GDP in FY2017 as compared to $2.6 billion or 0.9 percent of GDP in FY2016,” Topline Securities said in its daily market commentary .

A United Nations economic commission said the government’s policy of keeping the exchange rate stable by intervening in the foreign exchange market may become unsustainable if the US dollar appreciates against most major currencies in global markets.

The central bank said the continuation of high growth in imports led to a widening of current account deficit, “and consequently to depletion in the country’s foreign exchange reserves”.

“Almost half way into the current fiscal year, Pakistan’s economy is well positioned to achieve the real GDP growth target of 6 percent in 2017/18,” it added. “This positive outlook is supported by a broad-based 8.4 percent growth in large scale manufacturing during the first quarter of the year, and encouraging assessment of major crops, while services are likely to benefit from the positive spillovers of the growing commodity sector.”

Meanwhile, dealers said the rupee/dollar parity sharply fell due to the settlement of a loan scheme (FE25) under which the central bank provides loans to importers/exporters to settle their transactions.

Eman Khan, a currency analyst said exporters offloaded their proceeds at the 107.108 levels as they had seen a similar episode in last July when the rupee lost 3.1 percent to close at 108.25 and they didn’t want to miss the depreciation opportunity this time around.

“This led to increased supply and hence rupee strengthening,” Khan said.

Analysts said the rupee devaluation was not due to ‘speculative attack’ on rupee. Nor it was weighed down by worries over balance of payments position.

“The spike was not based on the sentiment of pressure on foreign reserves and lower expected future inflows,” a head of treasury at a major bank said. “Yes it was due to extraordinary oil related outflows from the market.”

In fact, the banker added that the SBP appears unwilling to make arrangements of dollars for the oil payments. “Its strategy is to maintain forex reserves at any cost.”

Interestingly, the country received $2.5 billion on account of Eurobond and sukuk, and consequently foreign exchange reserves rose to $20.986 billion as on December 5 from $18.744 billion in previous week.

Panic strikes forced the rupee to close at 108.20 in open market from 107.50 a day earlier.

“There was no shortage of dollar in kerb market,” Zafar Paracha, general secretary at Exchange Companies Association of Pakistan said. “Import payments are not spontaneous. But panic in the currency markets caused losses to investors.”