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Pakistan rupee dips as demand for greenback surges

Just 10 weeks ago, August 5, dollar was quoted at Rs58.86 in the interbank, and Rs. 59.00/59.05 in the kerb. The decline this week placed the rupee at a 35-month low. The rupee in the interbank market went past Rs. 61.70 to a dollar—the lowest since Oct. 26, 2001.

The demand for US dollars is rising to pay for growing imports, high prices of imported oil, a more than 9.0 per cent year-on-year inflation, larger travel requirements of Muslims going for the ‘Umra’ pilgrimage to Makkah and Medina in Saudi Arabia, and a widening trade deficit. The number of ‘Umra’ pilgrims during the current month of ‘Ramadan’ alone is estimated at 100,000. The week saw surging dollar demand from several industries and businesses, Government of Pakistan (GoP) itself, primarily to import military supplies and equipment.

Senior bankers said, high demand emanated from most of the banks, cement, fertilizer, oil importing companies and refineries, and a foreign airlines, a private electricity company and other businesses, repatriating their profits to parent corporates and multinationals, and dividends to shareholders abroad, as well as people transfering forex to buy real estate in Dubai. Dollar was quoted in the interbank market at Rs60.00/60.05 Oct. 18, compared to Rs59.75/59.85 on Oct.15. It was trading at 61.05/35 late Thursday Oct. 21, after hitting the 35-month low of Rs61.70.

The interbank rate of the dollar continued to go up, inspite of the warning by State Bank of Pakistan (SBP), the central bank. It asked the banks: “do not buy dollars at artificially high rates.” SBP is asking banks to assist it in checking the present dollar-buying spree that is pushing greenback purchases in the forward market. SBP’s success, on this score, so far, has been scant.

Dollar was quoted at 60.15 to 60.25 on Oct. 18. It was trading at Rs61.30/61.50 Oct. 21, according to Forex Association of Pakistan (FAP), before easing to Rs60.70 for buying and Rs61.00 for selling Oct. 22.

Several interventions in the market, by SBP this week, to stems the decline of the rupee were ineffective. The most significant of these was SBP’s sale of $ 35 to 40 million in a single day in the interbank market— that virtually serves as the ‘official rate.’ SBP’s total dollar sales in the week ended Oct., 15 was $ 50 million. Bankers and forex dealers say SPB’s interventions in the market through dollar sales in the interbank market have totaled $400 to 450 million during the first quarter. It did not stabilize the rupee, although the rate of its decline, in the interbank and kerb markets, may have been graduated. SPB has been letting the rupee depreciate against the dollar slowly in to keep Pakistani exports to the global market place competitive. But, independent economists are now questioning this policy. How long, and how for, can the central bank prop up the rupee? And, at what cost? Has this policy already failed? These apprehensions are based to the fact that the country’s hard earned forex reserves have already declined to $12.300 billion. Strong demand for dollars is also pushing the greenback’s forward rates. Large dollar purchases by large companies are one of the factors leading to the present rupee depreciation. The importers are also making excessive use of the SBP permission to book dollars in the forward market against registered contracts, by paying 50 per cent in advance to the suppliers abroad. Heavy forward booking are linked to speculation that dollar may climb further up, making it more costly against the rupee.

In the present rising environment of an appreciating dollar, the forward rate this week was quoted at a premium of Rs0.40/0.45 above the spot rate for three months, and Rs 0.74/0.79 for six months. That reflects a futurely firm demand for dollars. Forwards have constantly been moving up ranging the last nine weeks. However, one businessman discounted that demand is rising on fear of dollar becoming more expensive. "At the present high rate of premium on forward dollars, the greenback is already too expensive," he said. Bankers and businessmen are attributing the high dollar demand as emanating largely from ‘Umra’ pilgrims — that is seasonal.

Pakistani imports, in the first quarter of 2005, are rising rapidly because of capital goods and machinery for capacity expansion and modernisation to face the challenges of the WTO regime from January, 2005 onwards. The textile industry has already invested nearly $4 billion in imported machinery to produce value added products.

China, India and Pakistan are likely to be major players in global textiles and garments trade under WTO Industrial raw materials are also being imported in large quantities to produce more for the domestic market, and to enlarge exportable surpluses for the global market.