March 17, 2006	Friday	Safar 16, 1427

KARACHI, March 16: The rupee has lost more than 0.3 per cent of its value against the US dollar in the inter-bank market so far during this week. It has come down from around 59.98 a dollar on weekend to 60.17 a dollar on Thursday. This has happened due to strong demand for foreign exchange as the imports continue to rise faster than the exports and corporates collect dollars from the market to make outward payments.

In eight months to February, Pakistan’s import bill totalled $18 billion whereas it earned $10.6 billion through exports. So, the country saw a trade deficit of $7.4 billion. Small wonder than that the foreign exchange reserves declined by $1.2 billion in eight months of this fiscal year, coming down from $12.6 billion at end-June 2005 to $11.4 billion at end-February 2006. The recently released statistics show that in seven months to January 2006, the current account deficit also increased to $3.3 billion from less than a billion dollars a year-ago.

The dollar crossed Rs60 barrier in the inter-bank market after 15 months on February 22 — and on Thursday it closed at Rs60.17 after touching an intra-day high of Rs60.23-Rs60.24. Senior bankers say the demand for the dollar is originating both from corporates for making outward payments and from commercial importers. Besides, the government and government-run agencies continue to make debt payments creating further demand for foreign exchange.

Executives of local and foreign banks believe that the central bank has changed its policy of defending the rupee at 60 a dollar and is ready to let the local currency fall below this level. Some of them say the SBP would still defend the rupee at a new level-but there is no way one can know exactly the next support level. Some bankers believe it would be Rs60.50 per dollar.

For all practical purposes, the State Bank has kept the rupee under managed float and has kept the rupee at a certain level. It has been doing so in the name of “smoothing out volatilities in the exchange market” but monetary economists of international financial institutions like the IMF view this as maintaining a quasi peg in the exchange rates.

However, an all-time high trade deficit followed by a huge current account deficit now limits the State Bank’s ability to keep the rupee from falling. In eight months of this fiscal year, the foreign exchange reserves held by the SBP have already fallen by $850 million to $8.95 billion.

In the meantime, the rupee has lost 0.9 per cent of its value against the dollar so far this fiscal year and is likely to shed more value. The extent to which the rupee would fall further would depend on so many things including how best the government manages to attract huge inflows of foreign exchange to offset the impact of an all-time high trade deficit on the country’s balance of payments. Another thing on which future movements in exchange rates depends on whether the central banks want to let the rupee depreciate to benefit exporters and to avoid blames of keeping the rupee in oxygen tent for so long.

Before the end of this fiscal year, the government is due to receive a huge inflow of $1.14 billion from Etisalat, the UAE-based telecommunication giant that has bought 26 per cent shares of state-run Pakistan Telecommunication Company Ltd for $2.6 billion. (Etisalat has already paid $260 million as earnest money out of the first tranche of $1.40 billion. It will pay the remaining amount of $1.2 billion in instalments over a period of four and a half years). Besides, the government is going to launch $500 million Eurobond on 24th of this month.

Sources close to the Ministry of Finance say even if the twin positive developments really take place and even if Pakistan gets a few hundred million dollars more in earthquake-related aids and grants before the close of the fiscal year in June, Pakistan would still see at least a billion dollars deficit in its overall balance of payments. (Inflow of $525 million in earthquake-related aids and grants so far since the October 8, 2005 quake has made a little impact on the country’s BOP). That is why the rupee seems set to loose further value against the dollar in the remaining part of this fiscal year. But rupee’s depreciation is not undesirable at a time when it can provide the much-needed benefit to exporters.

After all, the Indian rupee has depreciated much faster since July last year. Between July 1, 2005 and March 16, 2006, the Indian rupee lost more than two per cent of its value against the dollar.