Rupee hits life low for fifth straight day as economic fears persist

KARACHI: The rupee plummeted for fifth straight session on Thursday as increased dollar demand for import payments in absence of foreign currency inflows and heightened uncertainties surrounding the country’s economy and politics continued to weigh on the domestic currency.

The local unit didn’t manage to catch a break from a precipitous downturn, falling 0.83 percent against the dollar, closing at 226.81 in the interbank market. It had ended at 224.92 on Wednesday.

The rupee has shed over 7 percent or 17 rupees in the past five sessions.

“The panic is not over yet. The market is still worried about how the government will arrange external financing on an immediate basis to make import payments and service foreign debt amid fast depleting foreign reserves as the IMF board meeting is likely to take place next month,” said a currency dealer.

The central bank tried to soothe nerves of the market saying Pakistan’s situation was different from Sri Lanka's and ruling out the country’s default risk. It said it was intervening cautiously to avert disorderly moves of the rupee, but with declining reserves as low as $9.8 billion, it can’t intervene frequently.

The government is seeking an urgent IMF board meeting to approve Pakistan’s request for a bailout package due to its worsening balance of payments position, according to reports.

However, an early meeting is not possible as the country hasn’t yet met all prior actions that the Washington-based lender has asked for calling the board meeting.

The IMF is seeking assurance on Saudi Arabia’s commitment to financing Pakistan before the multilateral lender disburses fresh funds to the country. The IMF wants to ensure that Saudi Arabia will follow through with as much as $4 billion in funding to Pakistan to ensure Islamabad doesn’t have a funding gap after the IMF loan.

The rupee has been under pressure on increasing panic in the financial markets coming from increasing risks after Pakistan-Tehreek-e-Insaf’s by-poll win added to worries over the country’s bailout deal, which it requires to evade a default.

Fitch Ratings revised its outlook for Pakistan’s sovereign debt from stable to negative, but it affirmed the Long-Term Foreign-Currency (LTFC) and Issuer Default Rating (IDR) at “B-“. However, the rating announcement weighed on the sentiment of the rupee.

Banks for higher rates to open/retire LCs

Banks have asked for higher rates to open or retire letters of credit (LCs) for oil imports in anticipation of a further slide in the rupee in days to come, according to some reports.

On Wednesday, some banks quoted Rs241 or above to retire LCs of oil shipments landed in May and June. The banks issued LCs to oil marketing companies above the official rate of Rs225-226.

A major crude oil importer withdrew its LC at the rate of Rs238/USD. A significant state-owned company retired its $70 million LC at the rate of Rs242/USD later in the day. This related to petrol brought in between May and June.

Market insiders said banks have been opening LCs at higher rates since the change of the government. Due to the country’s default, political, and exchange rate risks, the LCs confirmation rate has gone up to 10 percent.

“This is not a new phenomenon. The news just created unnecessary panic in the market. There was a big oil payment. The SBP makes large oil and LNG import payments or very high volume transactions on its own; it doesn't let it come to the market,” said a market insider.

Some import transactions carried on Rs226-230,” he added.

Banks typically cover a portion of the LC payments and the remaining amount when they receive flows. Banks are worried as the rupee is falling rapidly.

They acted quickly to close short positions, so the rupee started declining sharply. The central bank was not there to intervene because of limited reserves.

The country’s import bill rose 17 percent month-on-month to clock in at $7.7 billion in June, one of the highest monthly numbers on record. The surge was due to 40-50 percent higher crude and energy products volume.