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January 1, 2019

Rupee tumbles 25pc vs dollar

Business

January 1, 2019

KARACHI: The rupee hit repeated record lows against the dollar in 2018. It was down over 25 percent during the last year driven by a large current account deficit and increased foreign debt repayments by the government.

The rupee, one of the worst-performing Asian currencies, depreciated by almost 30 percent in six episodes since December 2017 as the central bank’s foreign exchange reserves fell to $7.457 billion as of December 21 from a record $18 billion in 2015/16 fiscal year.

High current account deficit, delay in the IMF bailout and political and economic uncertainties as well as negative market sentiment led to heightened volatility in the financial markets.

The country’s balance of payments came under pressure stemmed from high import bill. That resulted in a widening of current account deficit. A rising current account gap meant that there were more dollar outflows, therefore increasing the demand for the greenback. The current account deficit jumped to $18 billion in the last fiscal year from $12.6 billion in the previous year.

No rebound for the reeling rupee seems likely this year, according to foreign exchange analysts.

“Rupee will stay vulnerable throughout 2019 and will easily break 139 level as outflows will continue putting pressure on rupee,” a head of treasury sales at a mid-tier bank said. “Stringent measures taken by government to comply with IMF directives will hurt the growth in 2019, as a result economy will be in bad shape as compared to previous years and we will see new levels of dollar/rupee around 145.00.”

The rupee closed at 110.41 to the dollar on December 29, 2017 in the interbank market. It settled at 138.86 against the dollar on December 31, 2018. In the kerb market, the currency depreciated by 32 percent.

The rupee is currently trading at 139 against the dollar. It hovered at 106/107 per dollar in December last year.

Analysts at Tresmark Reserach, an application that tracks financial markets, do not think that a free float mechanism could be introduced any time soon.

“On the currency side, opinion is far more divided, but the difference in opinion is on the speed and extent of devaluation rather than the direction.

Some of the opinion leaders are of the view that the 1st quarter will see a nominal rise in rupee/dollar, which will be capped at 145/$, whereas others see it north of 150/$. This means that any weakening of the rupee will be sudden, just like previous episodes of devaluation,” Yaqoob Abubakar of Tresmark said.

Another Tresmark analyst Eman Khan said, “There seems to be slow but reasonable progress towards stability; however, political clouds hanging over and the uncertainty around securing an IMF loan will have a huge impact on a potential turnaround.”

The IMF believed rupee was over-valued and not in line with fundamentals. Former finance minister Ishaq Dar had kept rupee over-valued artificially during his tenure. However, the PML-N’s last finance minister Miftah Ismail allowed rupee to devalue to curb costly imports and boost exports.

The rupee stayed under pressure in the PTI-led government. It weakened by 11.8 percent since the new government took office in late August.

The State Bank of Pakistan (SBP) said the adjustments in exchange rate were broadly aligned with evolving fundamentals on the external front, reflecting the demand-supply conditions in the foreign exchange market.

SBP Governor Tariq Bajwa, at a finance and revenue standing committee meeting, said the SBP had been doing both— intervening at times to support exchange rate and making adjustments. The current account deficit improved and for the first five months of the 2018/19 fiscal year it narrowed 10.6 percent to $6.090 billion from $6.182 billion a year ago. The SBP has hiked policy rate by 425bps since January. It believes the pace of the deficit is still high. The widening gap between exports and imports will continue to pose a risk to the current account deficit outlook.

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