Rupee stays on the diving board

IS THE rupee on the diving board ? The opinion is growing that its a dive, rather than a transitional halt in its declining value against the weakening dollar and the other hard currencies.

By M. Aftab (Analysis)

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Published: Sun 20 Jul 2008, 11:44 PM

Last updated: Sun 5 Apr 2015, 12:54 PM

The rupee's 15 per cent depreciation since January 1 this year follows months of huge imports of oil, food, commodities, raw materials and even luxury goods, which hit external balances. It inflicted the economy with the widest-ever trade deficit of $20.75 billion during the fiscal 2007-08 that ended on June 30. The overall imports in 2008 were $39.97 billion. Exports were $19.22 billion. The year saw the widest fiscal, trade and current account deficits in history.

The travails of the rupee have been continuing for a considerable period, but it had deprecated to Rs73.90 a dollar on May 8.

Later, July 8 saw also euro traded at Rs114.40/114.80 as the rupee depreciation went on almost across the board, but recovered to Rs109.30/110.30, following the SBP intervention. The rupee, besides the dollar and euro, was also depreciating against the yen and the British pound.

The decline led to July 8 forex restrictions by State Bank of Pakistan (SBP), the central bank. The currency looked better after the SBP action and recovered to Rs68.70/69.50 early in the, but it went down into another down spin by July 17.

As the currency's spin-down continued, SBP intervened in the market with some tough restrictions on July 8. The new restrictions, to stabilise value of the rupee, slashing demand for dollars and other hard currencies, suspended forward cover forex facility for imports. It halved the permissible advance payment against imports from the prevailing 50 per cent to 25 per cent.

The SBP's July 8 announcement also says "it has been decided to temporarily suspend forward booking (of Dollars/hard currencies) against all types of imports."

Under the then prevailing arrangements, forex dealers and banks were permitted to purchase dollars against letters of credits. But in future they will not sell forex as advance covering for imports.

Importers were permitted to purchase dollars and hard currencies in advance up to the 50 per cent value of prospective imports. It has been reduced to "25 of the freight on board (FOB) or Cost and Freight (CoF) value of the goods to be imported."

Yet another restriction is, henceforth, all foreign exchange companies will have to obtain prior approval of the central banks for all transactions Of $50,000 or above on account of outward remittances or sale of forex.

On the positive side, SBP took upon itself the obligation of providing forex directly to dealers for buying furnace oil and other products inclusive of petroleum, oil and lubricants (POL) on Form-M which will be issued by the central bank's Exchange Policy Department. Until then, the authorised currency dealers were purchasing dollars for oil imports through the inter-bank market.

If the negative financial and economic factors were not enough, the uncertain policies of the present directionless Pakistan Peoples Party government, have hit the rupee adversely, too. It has lost the first crucial 111 days of its rule without indicating any strategy or vision to carry the economy forward, shore up forex reserves, protect value of the rupee, and check import of forex-wasting luxury goods. At the same time, exports - the main source of forex earnings - barely made the target for fiscal 2008.

The latest SBP forex restrictions helped the rupee for a while. But it started depreciating once again as demand for dollars stays high. Dollar was trading at Rs72.06 on July 17. It closed at Rs71.90/72.40 in the kerb on July 18, according to Forex Association of Pakistan (FAP).

Along with the restrictions SBP also announced it will buy dollars at Rs71.4850 - a reassuring step for comfort of the panicky forex market.

Why were dollars in such a short supply, besides real and speculative demand that forced the rupee to dip? One of the key reasons was that a very large number of Pakistani exporters were holding the sales proceeds of their exports abroad, hoping to make a big kill when the rupee depreciates further. In order to push such exporters to bring their held-up dollars home, the SBP July 8 orders were followed up, three days later with the directive of July 11.

It said, "despite SBP's clear instructions, a substantial amount of export proceeds is overdue. It has been viewed seriously." All exporters are mandated to bring back their export proceeds within an SBP-specified time, following the shipment date or opening of the Letters of Credit (L/Cs). The authorised banks and forex dealers are under the obligation of ensuring that export dollars are brought back home within the specified time.

Bankers and forex dealers are of the view, these actions will improve dollar inflows, ease the market and further help stem the currency's dive. The initial estimates by bankers and forex dealers are, this specific order will help bring "several hundred million dollars" of export proceeds back to Pakistan.

The SBP also needs to shore up its official forex reserves to foot the bill for growing imports which are expected to be higher not only quantity-wise, but also due to spiralling oil, commodity and industrial input prices. It will require lot of efforts because the end-June official forex reserves for fiscal 2008, compared to 2007, were down 37 per cent to $8.323 billion. The commercial banks were holding an additional $2.798 billion - a 16 per cent improvement over fiscal 2007. But that increase was mainly due to one-time sale-accrual from Malaysian Mybank, which paid $666 million for its purchase of 15 per cent shareholding of privately-owned Muslim Commercial Bank (MCB).

The demand for dollars is high, according to bankers and currency dealers. The dollar-rupee parity will have to be kept under watch, particularly because political ad economic instability continues besides reduced industrial output due to power outages and natural gas rationing, rising energy prices, market uncertainty and increased tax burden, continues.

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