Oct 12 - 18, 2009

Since January 2008, the rupee is under immense pressure after nearly 5-6 years of relative stability. The rupee is rapidly drifting lower against dollar on the currency market primarily due to importers are rushing for the US currency. PKR had touched the record low at Rs.84 in 2008 and exhibited slight recovery afterwards. The dollar inflows after $7.6 billion loan deal signed with the IMF brought stability in the exchange rate and it recovered to Rs78-79 to a US dollar. Presently it is again losing ground to the same note and in the first week of October 2009, the US dollar kept on hovering around Rs.83 in the interbank market.

Under the IMF agreement State Bank of Pakistan has shifted diesel import payment to the private sector from August 1, 2009. This factor has geared up dollar buying by private sector. The private sector is already making payment for import of furnace oil and after diesel, it has to arrange 50% of entire oil import bill. As a matter of fact, the private sector needs to arrange $3.5 to $4 billion during the year for import of furnace oil and diesel, if the oil prices do not mount further and stick with the existing level. In addition, by February 2010 private sector will be required to arrange $6 billion because as per the IMF agreement the entire oil import bill would be shifted to them by that time. The oil bill payment by the private sector is the main reason for high dollar demand in the market and it is projected to further surge in coming days.

Another underlying cause for depreciation of the rupee in open market is that major banks like Citibank, MCB Bank and others were buying dollars fearing further devaluation of the rupee following increase in greenback demand on account of oil import bill payment.

The freefall of rupee can also be attributed to the indifferent attitude of the institutions, which seem not bothered about arresting the rupee's slide. Banks buy dollar from the open market and then resell it to the importers at an unreasonably high rate. This practice tends to damage the economy slowly but surely. This misconduct gradually reduces public confidence in markets. Banks have the pretext that they are compelled to buy dollar from the open market to provide foreign exchange for payment of petroleum product imports, particularly furnace oil.

SBP provides exchange cover only for import of crude oil. As a result, there exists no logical correlation between rupees real exchange rate and open market rate.

The situation is further aggravated because of exports slowing, and proceeds of earlier exports being realized with long delays. This element leaves the banks with low stocks of foreign exchange and the expanding demand-supply gap is hastening the rupee's fall. Analysts believe that the demand for dollars will remain high during the current fiscal year and the rupee will remain under pressure.

Pakistan's foreign exchange reserves have risen to $14.75 billion. But, this significant improvement has also failed to support the rupee from falling against the dollar. This nontrivial improvement in the forex reserves is attained partly by funds borrowed from the IMF, ADB, and China. Because of this, the decline in the exchange rate goes on in spite of the fact that foreign exchange reserves have almost doubled over their mid-2008 level.

Exchange rate has a good deal of implications for resource allocation, trade, and balance of payments. Quantum of economic activities along with volatility in foreign exchange inflows result in visible changes in exchange market dynamics. With Pakistan's imports nearly twice its exports, rupee's depreciation at its current pace will have damaging consequences for the economy; in rupee terms, imports will become unfairly expensive and preclude any possibility of further containing the inflation, which is gradually contributing to public unrest at an increasingly widespread level.

It is interesting to note that the fading purchasing power of the rupee could be revitalized with the fall in the main inflation, which is expected to slip below 10% during the current year.

The eroding purchasing power of rupee at the present rate is prone to inflate import bill and inflation will rise at the same pace. Pakistan is relying on imported inputs for textile and other industries, which in turn lead to the production of export products. Therefore, any further erosion of rupee would give a lethal blow to domestic industry. The competitiveness of Pakistan's business and industry is dependent on controlling the devaluation of rupee. Faster the depreciation of the rupee, higher will be inflation. Increase in inflation will in turn ruin the already miserable life of common person in Pakistan who is living at bare subsistence level.


Some money market experts are predicting that the rupee could cross the Rs90/$ level before the end of 2009. This pessimistic foresight and apprehension reflects a loss of confidence in future. The whole situation is actually the consequence of remorseless practices of market players who have been illegitimately remitting precious foreign exchange abroad and the institutions, which turned a deaf ear and blind eyes to the entire issue when it was going on.

However, the government and regulatory authorities still have an option to infuse a spirit of revival in the system and strengthen the local currency. It is also observed that the exchange rate scenario is not good for the US currency in the global market, which means that dollar might lose weight against the international currencies that would have positive impact on the rupee. The recession in the US is still not ended and the low oil prices had reduced the dollar demand in the global market, which could reduce the dollar valuation in the coming months. If the oil prices remain at the same level and the remittances from IMF continue, the exchange rate may stabilize itself despite heavy buying of dollar by the private sector for oil import payment.