KARACHI: Dollar recorded unprecedented rise on Tuesday increasing by 7.5 percent which was the second largest appreciation in last 27 years in one session following the government’s decision to seek new loans from International Monetary Fund (IMF) to support of balance of payment position.
The domestic currency immediately after opening on Tuesday registered a jolt after importers demand hit the market and exporters swayed from the session. The rupee hit the all-time high mark of Rs 136 to dollar but most of the time trade around Rs 134 but at the close the currency finished at Rs 133.64 level.
The slide was around 7.5 percent or 9.39 rupees, which opened the flood gate of price increases in all the domestic commodities which are dependent upon the imports
The slide was the second biggest slide in single session, first was witnessed in 1999 on May 19, when the rupee depicted a slide of 10 percent.
Depreciation to increase the price of all the imported stuff like petroleum products, edible oil, milk powder, electronic items, mobile phones, dry fruits, tea and spices and other products.
The government had announced to approach IMF for new loans. The rumors were circulating since last month or so that the IMF will ask the government to depreciate or adjust the value of the domestic currency.
Prime Minister Imran Khan gave a green signal to his finance team for an IMF programme when they meet representatives of the Washington-based lender in Bali later this week. The loan will save Pakistan from defaulting on foreign payments. However, it comes with its own set of restrictions.
One of the conditions is a free float exchange rate as opposed to a managed exchange rate. This means that the central bank will not intervene in the market, and let market forces determine the actual rate of the US dollar against the Pakistani rupee. And this is precisely what seems to have happened.
The dollar surged to Rs133.6, up 7.4% from Monday’s rate of Rs124.3. This is because the central bank is not selling dollars in the market or asking other banks to do it, say market sources.
“Yes, there is an upward movement in the dollar and market expectations are driving it,” State Bank of Pakistan Chief Spokesperson Abid Qamar told a private television channel.
The government decision to seek an IMF bailout package affected market expectations, Qamar said, adding that in such situations the dollar initially shoots up but settles at a lower rate by the day’s end.
The SBP spokesperson said that he could not quote any rate at the moment because there were more than 30 banks quoting different rates, and it was changing every minute. “We will know the actual rate and the high and low points when the market closes. All banks report their exchange rates to us,” he said.
The interbank market rate is the benchmark rate to evaluate the dollar’s value, according to experts.
It is the interbank rate that determines the open market rate, which is usually slightly above the former, but does not indicate the actual value of the dollar.
Pakistan is seeking the IMF loan programme because its monthly imports exceed its exports by $2.7 billion, which leaves it with fewer reserves than it needs to pay for essential imports (oil, raw materials, machinery etc), and to repay its foreign loans (more than $90 billion).
According to the latest data, the government has $8.4 billion in reserves, which is the lowest level of foreign exchange reserves in the last four years and is not enough to sustain even two months of imports. During the tenure of former finance minister Ishaq Dar, the government used these reserves to manage the exchange rate at Rs106. The policy was criticised by both international and local experts.
Once Dar stepped down, the Pakistani rupee experienced several episodes of depreciation against the US dollar. Since December 2017, the dollar has appreciated 18% but sources familiar with the matter say the IMF wants Pakistan to shift from a managed exchange rate regime to a free-float regime, allowing market sources to determine dollar value.
If Pakistan adjusts its exchange rate, experts believe that the dollar will shoot up to Rs140, and may even hit Rs150. However, others believe that it will settle at around Rs135.
Meanwhile, a Press release issued by the State Bank of Pakistan said that exchange rate in the interbank market closed at PKR 133.64 to USD against previous day’s closing of PKR 124.27 to USD. This movement broadly reflects the current account dynamics and also the demand-supply gap in the foreign exchange market.
Although current account deficit narrowed in August 2018, a consistent increase in oil import bill on account of rising international oil prices has exerted pressure in the foreign exchange market.
SBP is of the view that this adjustment in the exchange rate along with lagged impact of recent hikes in the policy rate, and other policy measures to contain imports would correct the imbalances in the external account.
SBP will continue to closely monitor the situation and stand ready to intervene in case of any unwarranted volatility in the foreign exchange market. – Agencies