Greenback trades at 115: Dollar dips rupee to record fall

KARACHI: The rupee weakened to 116.25/dollar in early trade, before recovering some of the losses to settle at 115 by the close of the market. The rupee was quoted 110.57 against the dollar on Monday. Buying and selling dollar was closed in the open market after extreme depreciation of the rupee on Tuesday.

The rupee plunged over four percent against the dollar on Tuesday to hit an all-time low of 116.25 in apparent currency devaluation by the central bank after the current account deficit swelled to its widest on record, fanning fears about the sustainability of the economic recovery, traders said.

Traders said import payments, mounting balance of payments pressure and expectations that the government would declare a tax amnesty scheme on offshore assets soon sent the currency lower. They added the central bank also continued to ease its grip on the currency amid mounting economic pressure and talks that the country may need another International Monetary Fund support.

The State Bank of Pakistan (SBP) said the country’s external balance of payments position “is under pressure due to the large import bill”. “This has resulted in a widening of current account deficit which has translated into a demand-supply gap of foreign exchange,” the bank said in a statement. “This adjustment in exchange rate remains broadly aligned with evolving fundamentals on the external front.”

The bank said that continued deficit and external balance of payments were the reasons of increase in dollar value.

The current account deficit widened by 50 percent to $10.826 billion in the eight months of the current fiscal year, the central bank data showed. The current account gap was equivalent to 4.8 percent of gross domestic product in July-February FY18.

The SBP said the exchange rate movements would continue to reflect the demand-supply conditions in the foreign exchange market. “SBP will continue to closely monitor the foreign exchange markets; and stands ready to intervene to curb the emergence of speculative pressures.”

The rupee depreciated by five percent on December 8, 2017. During the last 10 years, it depreciated annually by five percent.

Currency dealers and traders said the currency depreciation didn’t come as a surprise and the central bank allowed the currency to decline as “it bowed to persistent economic pressure, including declining foreign-exchange reserves.”

“There was a surge in dollar demand from importers, but exporters were on the sidelines and the SBP was also missing to prevent the sharp fall,” a dealer said, requesting anonymity. “The SBP didn’t pump extra dollars to ease pressure.”

Foreign exchange reserves fell to $18.240 billion last week on external debt servicing and other payments.

Eman Khan an analyst at Tresmark Research said that the rupee plummeted could be an attempt to attract offshore money as well as curbing imports. “However, our burden on external debt payments would further increase as rupee devalue adds about PKR 90 billion to the total foreign debt plus servicing and increased inflation for masses,” Khan said. “Exporters are also of the view that devaluation can only boost exports one-off while foreign buyers demand discount but it pushes up cost of imports.”

The IMF in its recently report also stated that rupee is overvalued by 5-15 percent and suggested more exchange rate flexibility to fix external sector imbalances. “The authorities’ recent moves to tighten monetary policy and to allow some exchange rate adjustment are welcome and need to be complemented with continued exchange rate flexibility to safeguard external buffers,” the IMF said.

“Despite a five percent depreciation of the rupee/dollar exchange rate reserve losses have continued, pointing to limited effectiveness of these measures.” Brokerage Topline Securities said the rupee is expected to depreciate further to be “in line with the real effective exchange rate (REER) Index”, which it currently estimate at around 110. “We expect further rupee devaluation of at least 10-15 percent during FY19 and FY20, on top of devaluation of 9 percent in FY18 so far, taking the $/PKR parity to around Rs140 by Jun’20,” it said in a report on country’s state of economy.