Pakistan’s balance of payments is under significant pressure. Capital inflows which had in the past covered much of the current account gap, have out flown due the prolonged political uncertainty and adverse security climate.

The repatriation of profit by the foreign investors has registered a significant decline of 25.5 per cent during the first two months of the current fiscal year 2009, mainly due to the negative economic indicators. With the country currently facing balance of payment and liquidity difficulties, the rumours of Pakistan’s default is on rise.

Despite the prevailing crisis, analysts have rejected the impression that Pakistan is going to default. The country is still in a position to fulfill its commitments with the foreign institutions. In order to avert crisis like situation in the local currency market and to meet dollar demand of customers, the State Bank of Pakistan has offered out right sale of US dollars to all the exchange companies without any restriction of amount. The exchange companies have reportedly obtained millions of US dollars from State Bank of Pakistan. Hence there is no dearth or shortage of foreign currency in the market.

The SBP has taken several measures to stop the fall of rupee against the dollar. These steps have been taken by the central bank this week, after a free fall of rupee against the dollar due to high demand on the back of default rumours. The bank has reported slight increase in foreign exchange reserves this week. Analysts are hopeful that with the coming up of new aid, the situation would improve in coming weeks. However, the rupee has come under heavy pressure amid widespread rumours.

Meanwhile, the rupee in the inter bank market commenced the week on a positive note, as it managed to recover from weekend losses against the dollar, gaining 12 paisa on the buying counter and 10 paisa on the selling counter. The dollar traded at Rs78.33 and Rs78.40 on October 6, against previous week’s Rs78.45 and Rs78.50. However, the rupee came under tremendous pressure on October 7 due to sharp rise in demand for dollar amid speculative trading after Standard & Poor’s Rating Agency lowered both short and long-term rating for rupee in view of prevailing economic crisis. Consequently, the rupee lost 17 paisa on buying and 15 paisa on selling on the second trading day, when the dollar traded at Rs78.50 and Rs78.55.

Sharp rise in dollar demand continued to erode rupee value. On October 8, the rupee finally crossed Rs80 barrier and traded at Rs80.30 and Rs80.50 in early session before closing the day at Rs79.45 and Rs79.55, almost 100 paisa down from previous day’s close. In an attempt to restrict further erosion in rupee value, the central bank intervened in the local currency market and floated 100 million dollars to ensure uninterrupted dollar supplies in the market to counter speculative buying and release the pressure on the rupee. The State Bank has also assured the exchange companies of its support in case of any liquidity requirement.

As a result, the rupee managed to recover from its overnight weakness against the dollar in the inter bank market, where it gained 30 paisa on the buying counter and 35 paisa on the selling counter, changing hands at Rs79.15 and Rs79.20 on October 9. On October 10, the rupee traded unchanged at its overnight level against dollar due to slow activity. Steps taken in the past two days by the State Bank of Pakistan to restrict free fall in rupee value succeeded to some extent in restricting sharp decline in the inter bank rupee/dollar parity. However, on cumulative basis, the rupee in the inter bank market still lost 70 paisa against the dollar during the week in review.

In the open market, down trend in the rupee/dollar parity persisted throughout the week due to speculative trading. The week commenced on a negative note with dollar demand rising sharply. Dollar supplies failed to match demand giving rise to speculation. As a result, the rupee lost 40 paisa for buying and another 50 paisa on the selling counter, changing hands at 78.40 and Rs78.80 on the week’s opening day. The rupee had closed last week at Rs78.00 and Rs78.30.

The rupee extended its overnight weakness as demand for dollar continued to rise on the second trading day of the week in review, posting fresh losses of 30 paisa on the buying counter and 15 paisa on the selling counter. The dollar was at Rs78.70 and Rs78.95 at the close of the day. Another sharp decline in the rupee/dollar parity was witnessed in the open market on the third trading day when the rupee suffered 80 paisa fall for buying and 95 paisa loss on selling and traded at Rs79.50 and Rs79.90.

The rupee free fall against the dollar continued unabated despite SBP intervention in the currency market on the fourth trading day. The rupee crossed Rs80 barrier, losing 30 more against the dollar to trade at Rs79.80 and Rs80.20. At one point during the day the rupee was reported to have even crossed Rs81 mark for a short span. It further lost 50 paisa on the fifth trading day with dollar changing hands at Rs80.30 and Rs80.70 on October 10. During the entire week in review, the rupee in the open market lost Rs2.40 against the dollar.

Versus the European single common currency, the rupee reportedly improved on the opening day as it managed to recover over its overnight levels of Rs 110.68 and 110.78, gaining Rs 4.84 to trade at Rs 105.84 and Rs 105.94 on October 6.

However, the rupee failed to maintain its overnight firmness on the second trading day and shed 16 paisa on the buying counter and 26 paisa on the selling counter, changing hands against the euro at Rs 106.00 and Rs 106.20 on October 7. The falling trend persisted on October 8, as rupee posted fresh losses against the euro for the third consecutive day, losing 70 paisa to trade at Rs 106.70 and Rs 106.90.

A sharp decline in rupee over euro was witnessed on the fourth trading day of the week in review, when the rupee shed 130 paisa and traded at Rs 108.00 and Rs 108.15 on October 9. However, the rupee managed to recover its week long losses against euro on the last trading day, gaining 30 paisa on buying and 25 paisa on selling to trade at Rs 107.70 and Rs 107.90 on October 10. This week, the rupee lost Rs 2.98 against the euro on the buying counter and Rs 2.88 on the selling counter.

In the international financial market, the US dollar scaled a fresh 13-month peak versus the euro on the opening day of the week, while the yen surged broadly as investors dumped risky assets amid anxiety over the lack of a co-ordinated global response to the credit crisis. The euro tumbled to $1.3444, its lowest since late August 2007. The dollar dropped to a 4-1/2-month low of 100.26 yen, its biggest one-day decline in 10 years. It was last trading at 101.99 yen, down 3.1 percent on the day. Sterling dropped more than 2 percent to $1.7336, hitting its weakest level since April 2006.

On October 7, the euro rose as high as $1.3739, rebounding from a 13-month trough around $1.3444 hit on October 6. That decline was sparked by escalating worries about the health of European banks. In late New York trade, the euro was up 0.8 percent at $1.3599. Against the yen, the dollar dropped 0.4 percent to 101.40 yen as US stocks plunged in their fifth straight declining session as fears mounted that the spiralling credit crisis would drag the economy into a deep recession. Sterling was up 1 percent on the day at $1.7596, having hit a session high of $1.7657 - some 3 cents up from 2-1/2 year lows hit earlier at $1.7322.

On October 8, the dollar traded down 1.5 percent at 99.810 yen. The euro last traded up 0.5 percent at $1.3682. High-yielding commodity currencies tumbled, with the Australian and New Zealand dollars falling to five-year lows earlier at US $0.6439 and US $0.5791, respectively. Sterling weakened against the dollar and the euro as doubts began to emerge on the effectiveness of co-ordinated rate cuts delivered by leading central banks and a UK banking sector bailout package. The pound was down 0.6 percent against the dollar at $1.7372.

On October 9, the euro was off 0.3 percent at $1.3585, while the dollar was up 0.5 percent at 99.720 yen, after dropping to a six-month trough the previous session. Sterling eased against the dollar but held above 2-3/4 year lows hit earlier with sentiment still shaky. The pound stood at $1.7240, having hit its lowest since December 2005 at $1.7174 earlier in the global session.