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July 28, 2018

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Checks on dollar smuggling push rupee up 1.1 percent in open trade

KARACHI: Rupee sharply recovered over one percent against the US dollar in the open market on Friday as investor confidence was restored on prospects of political stability, while the government brought the cross-border movement of foreign currencies to a halt.

The rupee closed at 127.50 / dollar compared to its previous close of 128.90. The currency gained Rs1.4 against the dollar during the day. Rupee fell to 130 on Tuesday, a day before the elections.

Currency traders said the central bank’s restriction on inland movement of dollars and curb on smuggling also caused demand of greenback to wane off.

Zafar Paracha, secretary general of Exchange Companies Association of Pakistan said the rupee strengthened in the kerb market as the government closed the border-crossing during the last three to four days amid general elections in the country.

“This led a decline in the demand for dollars,” Paracha added. “Pakistan’s borders with Iran and Afghanistan are said to be the busy foreign exchange smuggling routes.”

Paracha further said the condition imposed by the central bank to make inland movement of rupee and foreign currency through bank accounts also helped the currency to gain ground.

Early this month, the State Bank of Pakistan restricted exchange companies from transportation of rupee between the cities. The central bank asked them to use bank accounts to wire transfer.

Traders said rupee accelerated its gains in the last two days, buoyed by improved sentiment after Pakistan Tehreek-e-Insaf (PTI) emerged as the single largest party after the general elections and came in the position to smoothly form the next government.

Traders said timely elections brought stability to the financial markets.

“Investor sentiment turned positive on hopes of increased political and economic stability,” a dealer said, requesting anonymity.

“The rupee is expected to appreciate further on hopes of dollar inflows under the head of new IMF (International Monetary Fund) arrangement in the coming months.”

Current account deficit widened 42 percent to $18 billion in the last fiscal year, bringing foreign reserves down to meet only two months of import cover. The deteriorating external account position emboldened a need of foreign funds to support balance of payments.

Last government said the incoming government might decide about the IMF’s bailout. The country successfully completed $6.7 billion of extended fund facility loan program of IMF in 2016.

The rupee also rose in the second straight session against the dollar in the interbank market. The rupee gained 31 paisas to close at 127.86 / dollar compared with the previous close of 128.17.

The rupee lost more than 20 percent against the dollar since December 2017. Analysts termed the devaluation as a logical and timely step to address external account vulnerabilities. The depreciation also helped in recovery of exports and improved competitiveness of exporters.

Rating agency Moody’s on Friday advised further exchange rate depreciation as one of the key possible policy options for the incoming government to reduce current account gap. It said IMF’s bailout may be another possible policy measure for the government- to-be.

It said Pakistan’s heightened external vulnerability is the chief credit challenge. Moody’s said other possible policy options would be monetary and fiscal policy tightening.

The rupee is forecast to depreciate to 135 / dollar if the country fails to shore up its foreign exchange reserves from the current critical levels.

The central bank’s foreign exchange reserves dropped $53 million to $9 billion during the week ended July 20.

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