ISLAMABAD, 22 July — Has euroization of Pakistan started in a big way? Initial indications are that it has. But, it may take considerable time for euro to conquer Pakistan where mighty dollar has held its sway for decades.
How will it affect foreign trade and investment flows? This is being closely watched by the government’s economic managers and the business.
Dollar itself had ousted the pound sterling in 1950s, nearly one and a half decade after the British quit the subcontinent, leaving an independent Pakistan and India behind.
The current week opened with euro, for the first time, crossed the greenback in rupee-dollar parity. Each euro is fetching more rupees than a dollar could get in terms of the Pakistani currency.
One of the amazing features of the euro’s drive across Pakistan is that it has upset the rather staid interbank market that virtually sets the rate for nearly 95 percent of all forex transactions and is considered to be almost the "official" exchange rate. In Pakistan’s forex trading history, the kerb market, for the first time, is selling dollars cheaper than the interbank rate, instead of the other way round.
Euro, for the first time, flew past Rs.60 on Tuesday — July 16 matching the dollar in parity. On this first day, euro closed at Rs.60.06/60.08 for ready buying and selling in the interbank market when the official trading closed. However, later the same evening, it rose to Rs.60.60, as the European currency gained strength internationally.
While the euro rose, and rose, once-mighty dollar and the darling of all Pakistanis as well as the countries across the globe, trailed behind and closed at Rs.59.67/59.69 in the interbank market — recording euro’s Rs.0.39 supremacy over the greenback.
At that point in time on Tuesday, euro had risen to $1.0147 from $1.0125 early that day. The European currency had started shooting up against the dollar on Monday, as US bourses were declining following growing concern about American economic future that was shaken by major corporate scandals and erosion of credibility.
Pakistan’s sizable kerb market also followed the interbank as euro crossed Rs.60 limit. Euro on July 16, closed at Rs.59.90/60.10 in spot buying and selling, according to the Forex Association of Pakistan (FAP) that represents the country’s 400 licensed money changers. The kerb rate indicated that euro is Rs.0.40 costlier than the dollar. "At one time, euro was selling at Rs.60.40, while the dollar was trailing behind at Rs.59.40," according to a key money changer. The dollar lost another Rs.0.35 or 0.6 percent against the rupee in the kerb on July 17.
It happened as the greenback continued to fall against the euro and several other major currencies. The dollar closed at Rs.59.25/59.35. At this rate, dollar turned cheaper in the open market compared to Rs.59.67/59.69 in the interbank rate — another first for the kerb. Dollar continued to fall under the impact of panic selling by a large number of Pakistani investors and dollar-holders who wished to hedge themselves as they feared more losses while the euro stayed on the upswing.
Over the weekend dollar was Rs.59.20/59.10 and euro Rs.59.85/59.65 in the kerb. Dollar in the interbank market was Rs.59.53/59.57, while euro was 59.65/59.85.
The State Bank of Pakistan (SBP) reports that dollar depreciated 6.5 percent during the fiscal 2002 that ended June 30. It depreciated further by 1.5 percent during the first fortnight of July, bringing the total depreciation to 8 percent in the kerb.
In Pakistan’s context the drubbing that the greenback is taking is due to two reasons: Dollar’s fall against the euro in the global market, and SBP’s lack of support to the dollar. The SBP, for months, had stopped intervening in the interbank and the kerb markets in Pakistan, to shore up the greenback. As the dollar continued to fall against the rupee in the recent months, the SBP did not come into the interbank market to buy greenbacks and stem the decline.
The rupee-dollar-euro parity and what is happening to it these days in the Pakistani market, has led economists, bankers, and forex trade question some of the SBP policies. One of the domestic reasons for the dollar declining is the fact that the SBP has stopped intervening in the forex market to defend the dollar and maintain it at Rs.60.00. Banking industry sources are of the view that SBP is now likely to start defending the dollar at Rs.59.40-59.50. Will SBP do so and how aggressively? Only the next few days will tell.
