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KARACHI, Oct 19: The US dollar flew past Rs60 on Tuesday with confidence to stay there and even rise further as the central bank let market forces to determine the rupee value instead of intervening to support it.
The US unit made a huge gain of 24 paisa in one go and rose to Rs60.22 from Rs59.98 on Monday, its highest level in 32 months.
The dollar breached the psychologically important barrier of Rs60 on increased demand from all sectors. "There was increased demand from all over, banks were buying dollars to make oil import payments for a refinery, a large cement company and a fertilizer company," said treasurer of a local bank.
He said that a foreign bank also made heavy dollar buying for a foreign airline that had to transfer abroad its earnings in Pakistan. Some bankers said a couple of banks also started dollar buying for a private power company that would remit dividends to its overseas shareholders on Wednesday. Besides, state-run National Bank was buying dollars on behalf of the Ministry of Defence presumably to finance defence purchases.
The combined impact of all these factors was that the rupee lost 24 paisa or 0.4 per cent value falling to 60.22 a US dollar.
On Monday also, the rupee had lost 20 paisa to close at 59.98. Thus, it has lost 44 paisa or more than 0.7 per cent value against the dollar within just two days.
The local currency has been under pressure from the start of this fiscal year and has shed 3.6 per cent value against the dollar since July 1.
A huge trade deficit due to soaring oil prices and higher demand for fuel and imported machinery and other goods has been responsible for this fall in the rupee value. The trade deficit rose to $839 million in July-September 2004 from $144 million a year ago.
PERCEPTIONS CHANGE: Senior bankers say a key reason for a sharp fall in the rupee value is that perceptions about the health of the local currency have changed. "In anticipation of further fall in the rupee value, exporters are holding back export proceeds to get as much exchange rate benefit as possible. Importers are making huge forward buying to suffer the least possible loss in exchange rates," said treasurer of a large local bank.
There are several factors that point to further weakening in the rupee value, the most important one being the possibility of further increase in trade deficit due to rising world oil prices and Pakistan's need to import fuel in larger quantity to keep the wheels of its growing economy moving.
Another important factor is the fact that current low interest rates have enabled corporates to borrow cheap money from banks and use the same to buy dollars and finance imports of machinery and plants for BMR and parts of automobiles not manufactured locally. Further, the public sector's import bill is also rising with Trading Corporation of Pakistan importing wheat and fertilizers to augment their local supplies.
INTERVENTIONS: The steep fall in the rupee value, 1.9 per cent in July-September, and 1.7 per cent so far during this month, raises a key question. Is SBP allowing the rupee to fall at this pace deliberately or has it failed in supporting the rupee through interventions? Inquiries made at various levels at SBP indicate that the rupee continues to fall as the central bank wants it to find its real worth through interaction of market forces.
But at the same time, the monetary authority has seemingly realised that supporting the rupee through interventions is not that easy now.
Since the official reserves of $10 billion plus cover only seven months' imports the State Bank cannot let them fall sharply by selling huge amounts of dollars everyday in the market. The central bank has learnt this lesson the hard way. It has sold hundreds of millions of dollars since July this year but has not been able to hold the rupee firm.
OUTFLOWS: In fact, outflows of foreign currencies are much larger than inflows. This is also evident from the fact that in July 2004, Pakistan witnessed a current account deficit of $37 million whereas it had seen a surplus of $469 million in July 2003. Apart from growing imports, what else has led to huge outflows of foreign currencies is that the importers are taking undue advantage of the permission granted to them to book forward dollars against registered contracts and make up to 50 per cent advance payments to their suppliers.
