Where will Pakistani rupee's decline stop?

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Where will Pakistani rupees decline stop?
The rupee was trading at 110 and 110.80 against the US dollar at buying and selling counters, respectively, on Saturday.

Published: Sat 16 Dec 2017, 8:00 PM

Last updated: Sat 16 Dec 2017, 10:06 PM

Overseas Pakistanis, local businessmen and the government were asking only one question last week: Where will the declining rupee stop?
The currency fell 3.9 per cent to a 70-year low on December 8 at 109.50 against a US dollar. However, at the close of the day the dollar was trading at Rs107.50 in the inter-bank market. Still, it was the biggest single day fall since 2013.
The rupee was changing hands at 110 and 110.80 against the US dollar at buying and selling counters, respectively, in inter-bank market on Saturday while in open market it was traded at 110 and 110.90 against the greenback.
The rising price oil in the international market came out as yet another problem for rupee. Import of other commodities including cooking oil, industrial raw material and capital goods will turn out to be more expensive following the rupee depreciation. It will start a wave of higher domestic prices and push inflation up.
Some currency dealers are speculating that the "Pakistani currency should go down to 115 to a dollar." The SBP and the Ministry of Finance had always curbed and resisted such speculation. Some people had even thought the ailing Finance Minister Ishaq Dar was "artificially keeping the exchange rate unchanged."
Exporters of textile even blamed that the artificial high exchange rates were responsible for the low textile exports.
The State Bank of Pakistan (SBP), the central bank, commenting on the decline, said: "The current movement in the exchange rate is based on demand and supply of foreign exchange in the inter-bank market. This market-driven adjustment in the exchange rate will contain the imbalance in the external account and sustain higher growth trajectory."
The SBP also said the exchange rate will continue to reflect the demand and supply conditions and "we stand ready to intervene in case speculative or momentary pressures emerge for smooth functioning of the foreign exchange markets".
An IMF delegation and the government of Pakistan during a review of the Pakistani economy agreed on December 8 "to allow rupee depreciation," an IMF official said, after the first round of discussions.
Shahid Mahmood, Secretary Ministry of Finance and Herald Finger of the MF headed the two teams.
A spokesman of Ministry of Finance said: "The SBP will now let the currency exchange rate to adjust to the market conditions."
The decision to make this announcement was timed with materialisation of $2.5 billion worth of receipts from two Pakistani government international bonds.
Mohammad Sohail, chief executive officer at Topline Securities, said: "The SBP seems to have decided to let the currency find its equilibrium, based on supply and demand."
A currency dealer said: "It seems, the central bank has decided to continue with its policy to allow adjustments in the exchange rate to help contain the widening balance of payments pressures."
Another analyst said: "Rupee is likely to lose more value as it is overvalued to the extent of 10 per cent, indicating a room for further decline. The market is anticipating a new support level of 112 in the near term. The government had adopted a strong rupee policy and turned into an almost-fixed exchange rate - one that caused a drop in exports and home remittance sent by the overseas Pakistanis."
Muzzamil Aslam, CEO of EPG Hermes Pakistan, said: "Presently the central bank is allowing the market rate to determine the value of rupee, but it seems to be reversing the extreme volatility, if any in intra-day trading."
"I see the rupee settling somewhere from 110 to 111. I think, it will not be allowed to pass 112 against a dollar," says Samiullah Tariq, director of Research at Arif Habib Securities.
One of the most important of all comments came from Malik Bostan, president of Forex Association of Pakistan, the powerful currency dealers' organisation. He said: "The dollar price will increase alarmingly if the SBP does not intervene. The SBP must announce keeping the dollar price at Rs112, otherwise the speculators will take advantage of the situation."
In recent weeks, the exports were inching up. The home remittances sent by overseas Pakistanis have begun to rise. The remittances rose almost 1.9 per cent during the first five months - July-November of FY-18 compared to like period of FY-17, according to the unofficial reports. Based on these indicators the government expects the rupee to stabilise. But only time will tell, whether this expectations come true.
The writer is based in Islamabad. Views expressed are his own and do not reflect the newspaper's policy.

By M. Aftab
 Analysis

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