ISLAMABAD, 9 August 2004 — Where will the rupee’s current slide end? Heavy demand is pushing the rupee-dollar parity down. The end of this slide is not immediately visible on the horizon.
Interventions into the market by State Bank of Pakistan (SBP), the central bank, though small and infrequent, have proved to be ineffective to stem the tide, so far.
SBP intervened in the market on Wednesday when the rupee sank and dollar rose to Rs.59.30/59.40 in the inter bank market. It came on the back of heavy, and largely speculative, forward dollar buying by big business groups. SBP did not say what the volume of the intervention was, but market sources said, the central bank sold between $25 million in the market to stop the downslide. The dollar, after the SBP intervention and the warning, closed at Rs.58.92, compared to the day’s high of Rs.59.30/59.40, and the previous day’s rate of Rs.58.79. The greenback closed on Thursday at Rs.58.86, moving at one point to Rs.59.05. Pakistani currency has lost Rs.0.74 – equivalent to 1.3 percent — in 37 days starting July 1.
In the kerb, dollar that traded at 58.70/58.75 July 31, was down to Rs.59.00/59.05 on Friday.
The SBP’s non-intervention policy that lasted until this week saw rupee sliding down rapidly. It appeared to be part of the SBP policy to let the rupee slide down to assist exporters stay competitive in the global market place, because their domestic cost of production is inching up, following a bit of tightening of the monetary policy. The tightening is leading to an across the board interest rate hike. The official export target for 2005 is $13.7 billion.
Already in a declining mode since March because of the widening balance of trade (BoT) deficit, the rupee’s further slide set in motion following the new monetary policy announcement on July 21. Fiscal 2004 had ended June 30 with a recent record high BoT deficit of $ 3.2 billion, mainly due to larger imports of machinery and industrial raw materials, as well as higher oil prices.
Added to this are other elements. These include the market speculation that rupee will slide down further in the near future, the ongoing flight of capital particularly to Dubai and the Gulf where new residential housing and commercial property is being offered to Pakistanis, and the speculation spearheaded by commercial banks regarding a greater fall in the rupee’s value as a result of a $100 million foreign loan prepayment to a Japanese company by Karachi-based Pakistan Arab Oil Refinery Company (Parco). But the SPB got the prepayment by Parco postponed for three months to reduce the rush for dollars. The incident of the proposed Parco prepayment of just $100 million shows fragility of the rupee and the forex system on the one hand, and the degree of damage that speculators, forex exchange companies and banks, can do to the rupee-dollar parity. The intense speculation and the run on dollars, also brought out one of the rare warnings by SBP. Its chief spokesman Syed Wasimuddin said, “SBP is vigilant and constantly monitoring the market. It will continue to manage the volatility in exchange rates and will not allow speculators to put undue pressure on the rupee.”
Officials also said that SBP is considering steps, including legal measures, to ensure that the Gulf housing offerings do not encourage flight of capital from Pakistan.
SBP, this week, has been asking both foreign and domestic commercial banks to slowdown dollar purchases for their customers, in order to take pressure off the market and restrain the greenback from rising. The Exchange and Debt Management Department (EDMD) of SBP, bankers said, asked them to unofficially cap the inter bank rate at Rs.58.90. But, the banks did not seem to listen, as dollar continued to go up. SBP also offered to itself dollars to anyone at Rs.58.90. SPB’s Deputy Governor and head of Treasury Zafar Sheikh said, “we are closely watching the exchange rates and will check speculative trading.”
The fall of the rupee against the dollar has been rather significant, compared to its relative stability and, even appreciation, in fiscal 2003. The decline in the first two days of this week—Monday and Tuesday — alone was Rs.0.35 or 0.6 percent when the greenback was traded at Rs.58.90 on Aug. 4.
The rupee’s travails started in early 2004 as dollar inflows slackened and demand for forex rose. The rupee-dollar parity began to indicate the impact of “a fast declining BoP surplus. The rupee depreciated marginally by 0.6 percent in fiscal 2004, in contrast to a 3.9 percent appreciation in 2003 and 6.8 percent in 2002. The SBP intervened in the forex market starting March 2004 in order to ensure stability of the exchange rate and to stem the quick slide of the rupee against dollar. The central bank sold $461.8 million in the inter bank market during March-June, 2004. The gradual slide down of the rupee, however, improved the export competitiveness as the real effective exchange rate index showed a real depreciation of 2.8 percent in 2004,compared to 1.6 percent in 2003. A better competitiveness pushed exports to an all-time high of $12.1 billion.