• Rupee depreciates by Rs24.54 in interbank market
• Experts predict more pain as inflation set to jump
KARACHI: The forewarning of a meltdown as soon as the ‘unannounced’ peg on the dollar rate would be lifted materialised on Thursday when the USD value shot up by a record Rs24.54 in the interbank market.
The government’s move to remove ‘the cap’ and to allow market factors to determine the exchange rate came at the back of the International Monetary Fund’s demand to revive the stalled loan programme.
The USD closed in the interbank at Rs255.43, after an increase of 10.6 per cent, while the rate in the open market fluctuated between Rs257 and Rs260.
On Wednesday, the dollar closed at Rs230.89 in the interbank market.
The government’s move to take the reins off the interbank market came a day after exchange companies removed a self-imposed cap on the dollar rate. The move, as expected, shot the open market value of the dollar to Rs252.5 but the State Bank intervened to bring it down to Rs243.
Thursday’s move took the currency market by a surprise and resulted in extreme volatility. The trading remained thin in the interbank as currency dealers were cautious in watching the dollar movement.
“It’s a mayhem [and] bloodbath for the economy,” said a top banking official who called it a “right decision at the wrong time”.
He said trade and industry will suffer for a long period to pay the cost of this move.
The move to remove all restrictions on the exchange rate shocked currency dealers who said there was no coordination between the finance ministry and the central bank.
As Pakistan’s forex reserves reached dangerously low levels, the de-capping was intended to generate liquidity from exporters.
However, bankers said export proceeds did not return in line with the government’s expectations.
“The first day was highly uncertain. The exporters were mostly watching to see stability in the exchange rate,” said currency expert Anwar Jamal.
“I believe the inflows will begin from next week,” he added.
Bankers also said exporters did not turn to banks for selling their proceeds.
However, they expressed hope that the situation will improve from next week.
The drying foreign reserves have led to containers piling up on the ports as banks were denying the letter of credit to the importers.
A highly-placed source in the finance industry said four vessels, two carrying petroleum products, one LNG and one soybean oil, were standing near the port. They couldn’t be berthed as there were no dollars to pay for the commodities.
Thursday’s dip in the value of the rupee has set a new record.
Ismail Iqbal Securities’ Head of Research Fahad Rauf said it was the largest single-day decline in both absolute and percentage terms since the introduction of the new exchange rate system in 1999, Dawn.com reported.
The last major single-day movement in the USD-PKR exchange rate was witnessed in Oct 2018, when the rupee slid by 7pc against the dollar to settle at 133.64, said Tahir Abbas, head of research at Arif Habib Limited.
He added the depreciation five years ago came at the back of similar economic challenges on the external front.
The over 10pc dip was significant even as the rupee remained under pressure throughout 2022 as it lost around 20pc of its value against the dollar.
The SBP had allowed this depreciation to make imports expensive and incentivise exports. As a consequence of the continuous depreciation, the current account deficit – difference between exports and imports – reduced significantly by 60pc in the first half of FY23.
‘New wave of inflation’
With the dollar now at the mercy of market factors, a new wave of inflation is set to pang the people who are already reeling under the rising cost of living.
According to the experts, the 10pc devaluation of the rupee could increase diesel prices by Rs50 per litre, with GST at zero.
But, if the IMF’s demand for a 17pc GST on petroleum products was also imposed, the prices would touch new highs, experts said.
Although the SBP raised the interest rate by 1pc to 17pc on Monday, the inflation on the back of increased dollar value will further prompt the central bank to hike interest rates.
Thursday’s move indicated an urgency on the government’s part to get in line with the IMF’s demand.
The move came a day after Finance Minister Ishaq Dar met an official of the US Treasury Department. The finance minister reportedly sought help to convince the IMF to be lenient towards Pakistan in restoring the programme.
Published in Dawn, January 27th, 2023
Dear visitor, the comments section is undergoing an overhaul and will return soon.