Rupee falls to one year-low; more weakness in store

KARACHI: The rupee slid to its lowest in over a year on Thursday as worries about a potential widening of current account deficit after a hefty trade gap during the first two months of fiscal 2021/22 sparked a shift sway from local currency.

Moreover, political tension in Afghanistan has also triggered demand for the US currency forcing traders to plough into dollars until the uncertainty persists. In the interbank market, the rupee weakened to 167.35 per dollar, before recovering losses to close at 166.98, a fourth straight session of declines, and is down 5.77 percent so far this fiscal year.

Thursday’s closing of the rupee was the lowest since August 2020. The local unit ended trade at 166.87 on Wednesday. Dealers said the rupee traded at 168 level, but it closed at 167.90 to the dollar in the kerb market, compared with 167.80 in the previous session.

Pakistani currency became the worst performer in 13 Asian countries. Other countries amongst the worst performers are Thailand, the Philippines and South Korea.

“The rupee had been under pressure since August due to higher import payments and reduced dollar supplies, but there was a panic after the trade numbers were released yesterday [Wednesday],” said a currency dealer. Dealers said there had been oil, food commodities and machinery import payments and inflows from remittances and the export proceeds were not enough to meet importers demand.

Trade deficit swelled 133 percent year-on-year to $4.05 billion alone in August. It jumped 114 percent to $7.32 billion in the first two months of the current fiscal year. Imports rose 89.9 percent to $6.31 billion in August, while exports increased 42.5 percent to $2.25 billion.

“The ongoing decline in exchange rate depreciation is the outcome of above-trend GDP [gross domestic product] growth, which has fueled trade deficit,” said Muzammil Aslam, the CEO at Tangent Capital.

The State Bank of Pakistan (SBP) has already discarded the policy of defending exchange rate and following the flexible policy, driven by demand-supply.

"We believe the rupee has already lost 10 percent from its recent high, sufficient to cap the escalating deficit. Therefore, we expect exchange decline to stem from here,” Aslam said.

Analysts said import speed is twice as exports and suggested that some checks are needed as far as imports are concerned. “Other thing worrying me skyrocketing global commodity prices and logistics,” Aslam said

Analysts said the rising import bill, comparatively sluggish growth in the exports receipts, and an expected slowdown in the remittances from overseas Pakistani workers could push the current account imbalance higher. The current account deficit is expected to reach $10 billion this fiscal year.

The imports of raw materials and capital goods are on an upward trajectory as the industrial activity is gaining momentum.

Financing disbursed under Temporary Economic Refinance Facility, one of SBP’s measures during Covid-19 to support investment, amount to Rs151 billion, whereas the total approved amount has been Rs435 billion.

Samiullah Tariq, the head of research at Pak-Kuwait Investment Company said the current account deficit is pushing the dollar higher.

“The SBP does not defend rupee by using its reserves. If the current account deficit continues to remain higher, rupee would continue to weaken,” Tariq said.

Some analysts believe lingering concerns over the possible spillover of unrest in Afghanistan weigh on the local unit. The Taliban, after US withdrawl, are facing economic challenges due to its high dependence on imports and foreign aid and fragile economy.

Khurram Schehzad, a CEO of Alpha Beta Core said inflow of dollars in Afghanistan has been dried so, "this requirement [dollar] is meeting through the neighbouring markets".

“We see the rupee to stay under pressure for few months and can be seen volatility in the short-term due to the uncertainty in Afghanistan. The domestic currency will eventually be stabilised if normalcy comes to Afghanistan.”

Schehzad said the rupee is likely to continue its slide anticipating a retest of last year’s low of 168.50/$ this month unless there is a significant improvement on the Afghan issue and if the Fed decides on a dot plot beginning after 2023. The dot plot is used by the US central bank to signal its outlook for the path of interest rates.