Rupee vulnerable to looming balance of payment crisis

KARACHI: Rupee closed largely stable and moved in the range of Rs133 to 134 in the interbank market on Wednesday, following previous day’s sharp fall in its value though analysts warn over an uneasy calm within financial markets, noting that the currency remains vulnerable to looming balance-of-payments crisis.

Analysts said the rupee is expected to depreciate to as low as 142-143 per dollar by December and January 2019 if the country goes to negotiate the International Monetary Fund (IMF) to secure its financial support.

“More devaluation of 5 to 6 percent is likely before or after entry into the IMF program,” Fawad Khan, a director at BMA Capital said.

“The recent devaluation is seen as a necessary evil required to discourage imports and aggregate demand though it will prove to be inflationary.”

At Tuesday’s low of 133.64, the rupee was down nearly 8 percent from its previous close of 124.27 in the interbank market. It was settled at 133.76 per dollar on Wednesday.

The rupee depreciated by a cumulative 26 percent since December last year.

In the open market, the local unit closed at 135 to the dollar compared with 134.50 a day earlier.

Pakistan has yet to formally approach the IMF for a bailout package.

Analysts are unanimous that IMF program means ‘a much more depreciation’ than Tuesday’s move. Pakistan completed the three-year IMF’s extended fund facility program of $6.7 billion in September 2016.

The SBP is likely to go to more market-oriented exchange rate mechanism in the period ahead.

“We see upside risks to our USD-PKR forecasts, and tighter fiscal and monetary policy,” an economist at Standard Chartered Bank said.

Economist Salman Shah, however, said the latest adjustment in the exchange rate was enough to tackle the higher current account deficit at least for the short-term period.

“We need to monitor the impact of currency devaluation on the balance of payments position,” Shah added. “If the current account gap is shrinking and foreign exchange reserves are building up, we don’t need to stick to the path of rupee weakening.”

Current account numbers of the first quarter are yet to come, but quarterly trade data showed a relatively satisfactory trend as trade deficit fell 1.6 percent to $8.9 billion, due mainly to decline in imports. Trade deficit stood at $2.7 billion in September, down 2.4 percent over the corresponding month a year earlier.

Economist Ashfaque Hasan Khan said the trade gap is narrowing on flat imports, indicating that rising oil prices haven’t impacted the imports as “we thought”.

Khan said exports may increase by $2-2.5 billion if the measures taken by the government to boost exports are properly implemented.

“The currency depreciation depends on market sentiments and dynamics,” Khan, who is a member of the Economic Advisory Council, added. “The factors that have hit the rupee losses so far are expected to change in the near term.”

The latest episode of the currency adjustment is estimated to increase the foreign debt and liabilities, in rupee terms, by 10 percent to Rs12.72 trillion.

The country’s gross external financing requirement has already surpassed $30 billion for the current fiscal year.

Currently, the country needs $10-12 billion to cover its current account deficit and make external loan repayments.

The International Monetary Fund, in a latest report, said current account deficit would continue to rise to 5.9 percent of GDP during the current year as against 4.1 percent during the last year, but it is likely to come down to 5.3 percent in the next years.