Plight Of The Pakistani Rupee

Pakistani rupee has plunged mercilessly to lows that are usually unbelievable causing serious harms to the national economy.

As a consequence, the rupee has become the most depressed currency in the region and the fears are that crunch of dollars will further depreciate its value.

The rupee also suffered due to the acute political instability that has gripped Pakistan since the last many years. This problem necessitated the change of government that brought in a new financial team reputed for its so-called wizardry in such matters but somehow it stalled the financial decision making. The new financial management insisted upon holding the value of rupee against dollar and capped it creating a booming grey market with the spread between official and non-official exchange rates of dollar wildly swinging between 15 to 20 rupees. Moreover, due to tightly restricting imports the foreign exchange equivalent was hard to come by as on the one hand the country started hemorrhaging dollars as reportedly they were smuggled as well as hoarded and on the other hand letters of credit were not honoured creating shortage of crucial imports grid locking industry further exacerbating the economic woes.

As the rupee continued to weaken faster than market expectations doubts and fears were mounting over the country’s economic health, particularly its ability to pay the import bill for essential items in the coming weeks.

The exchange rate had been primarily hit hard by a steep decline in the central bank’s foreign exchange reserves, which have shrunk to a near nine-year low of $4.34 billion.

The stock market, beset by political uncertainty and worrying economic indicators, is also on the decline and fell in many sessions. Currency experts said the rupee was falling despite being managed by the State Bank of Pakistan (SBP). The shortage of dollars has started to negatively affect all sectors of economy, and many believe that the country would soon notice the shortage of petroleum products along with basic essential items like food items. It is also mentioned that there have been no significant inflows since June when China provided $2.5 billion.

The economic experts are watching the outflows despite low imports and $2 billion inflows of remittances per month on average.

After consistent reluctance of the IMF to release the much-needed financial tranche as it was insisting on letting the price of dollar adjust according to the market requirement and the newly installed finance minister taking the opposite course of action, the rupee suffered the consequences. The situation grew complicated with the protestations of trade and industry circles growing louder as their letters of credit were not honoured costing very dear to the importers and industry owners because they were compelled to spend large chunks of money owing to the demurrages incurred at the ports.

The situation came to a pass whereby the head of the State Bank was publicly chastised by the industrialists with some of them alleging corruption within the ranks of personnel of the central bank. These pressures finally prompted the foreign exchange companies to lift the price cap on the dollar saying it had caused artificial distortions and created a black market, where the US currency was selling at higher rates.

In the process of keeping the cap on, one crucial factor emerged that was the difference in rates between the interbank and open markets that widened to Rs.15 to 20 in recent months. Resultantly, before the cap on the rupee was removed, markets experienced three different rates to assess its value: the SBP’s official rate, the one assessed by the foreign exchange companies and the black-market rate. In this context it was pointed out that shortly after taking over in September last year, Finance Minister Dar had termed rupee’s depreciation against the US dollar as the mother of all evils and introduced a host of administrative measures in collaboration with the central bank to keep the exchange rate in check. However, as the country’s foreign exchange reserves declined rapidly, the financial sector had urged Dar to stop managing the rupee-dollar parity, which is one of the key conditions set by the IMF for resuming stalled talks.

Just after the exchange rate was de-capped what was experienced was a steep depreciation and it was reported that this was the largest single-day decline in both absolute and percentage terms since the introduction of the new exchange rate system in 1999. Separately, the rupee was traded at Rs.255 per dollar, reportedly also a record low in the open market equating a depreciation of Rs.12 or 4.94 per cent over the previous day rate of Rs.243.

One crucial factor that emerged was that the difference in rates between the interbank and open markets which had widened to Rs.15 to 20 in recent months was almost wiped out. It was opined that it was a much-awaited adjustment that allowed banks to quote an exchange rate based on demand and supply in the market. In this context it was also pointed out that Pakistan adhered to a market-based exchange rate till September last year implying that the change was brought about by the incumbent finance minister that caused more harm than good. With the change in monetary policy the interbank rate was kept within a narrow band that gave rise to a grey market.

The change in policy will gradually eliminate the spread between interbank and grey market rates that will help in increasing exports and inward remittances through banking channels. It has already resulted in the IMF announcing visit of its team to parley about reviving the delayed ninth review and once it is successfully completed then the IMF’s finance tranche will be released and will also hasten inflows from friendly countries. Surprisingly, however, that there were no sellers, only people looking to buy the dollar as it was expected that it would further gain in value. In the meanwhile it was also reported that commercial banks were not supplying dollars to exchange companies despite the SBP’s directives. Quite obviously, the banks expect the dollar to go up and they would try to hold it longer as possible.

This impression is supported by the fact that the black-market rate is still sticking in the range of Rs.260-270 and the decision of exchange companies has not had any impact as such. However, Stock market investors responded positively to the decision to remove the currency cap with the Pakistan Stock Ex¬change’s benchmark index rising.

Nevertheless, the SBP’s reserves at $4.34 billion were alarming for the country and their low-level is contributing to depressed economic activity. The finance ministry has assured the exporters of allowing imports for inputs but the currency experts were still looking for improvement as it is repeatedly mentioned that immediate help was needed to save the country from default and the people from a situation like Sri Lanka.

However, exporters welcomed the decision but said it was too late since they had lost a significant share in the international market, particularly in textiles, where Bangladesh had increased its edge during the last six months. The situation is quite dire and requires urgent amelioratory measures.