Sep 1 - 7, 2008

The Pakistani rupee plunged to an all-time low against the U.S. dollar amid political uncertainty. The rupee has traded as low as around 76 against the dollar in the official inter-bank market, but recovered to close at 75.90 rupees. It is the first time in Pakistan's history that the rupee is on such a sharp decline and no assurance seems working either of the federal government or the State Bank of Pakistan (SBP) about better performance of the local currency. Pakistan's economy has been under tremendous inflationary and deficit pressure, whereas the stock market is also not stable. It is believed that exporters are holding their dollars whereas panicky importers are buying more and more dollars because of uncertain political situation. The majority of Pakistani companies have at least 70% of their foreign exchange transactions in US Dollars. This is wholly unacceptable from the point of view of prudent Risk Management. "Don't put all your eggs in one basket" is the essence of Risk Diversification, one of the cornerstones of prudent Risk Management.


In a recent transaction, US Dollar climbed to seven-week peaks against the Euro and major currencies, as oil prices plunged. The US Dollar's performance against the Euro is closely correlated to the direction of oil prices, with cheaper oil generally supporting the US currency. Interestingly, Pak Rupee is depreciating against US Dollar besides other currencies whereas in comparison US Dollar is weakening against other currencies. The Pakistani rupee weakened almost 30% against the US dollar during the past 6 months. Due to increasing imports the country is spending billions of dollars on import payment, which is directly hurting the foreign reserves and exchange rate. One of the expensive import items is oil which is procured from Middle East for domestic usage. With international oil prices touching US$ 120 per barrel, the rupee remains under pressure due to considerable increase in the payments of oil procurement. Despite the fact that international oil prices are historically all time high and there seems no stability on price front and difficult to estimate price trend.


Besides this, the benchmark 100-index at the Karachi Stock Exchange also took a nose dive in the midst of economic crisis and consequently, Pakistani investors started diverting their funds from local stocks to the US dollars. The US dollar has almost vanished from the market. Outward payments are abnormally high, whereas inward receipts become drastically slow.


Pakistan's public debt has gone up by approximately Rs. 630 billion due to depreciation of rupee against dollar in the past two months. Since Pakistan's public debt is all time high, depreciation of one rupee against dollar would add Rs 45 billion to it. Dollar-rupee parity was around 1:65 some two months back. Then unending rupee nosedive changed this ratio to 1:75.90 on August 28, even it touched 78 few days back. The difference simply means addition of Rs 630 billion in public debt in 60 days or so, without getting loan of even a single dollar from any source. On one side, the Ministry of Finance (MoF) is in shock over this development, and on other it is not taking any concrete steps in controlling this slide. Obviously this has been a cause of concern for the economic team but they say that SBP is an autonomous body and any direction for correction would be against the rules of the game. MoF are of the view that since the SBP is enjoying full autonomy, it is the only authority to take corrective measures for checking any fluctuation in exchange rate. In the current situation, is it logical to follow this strategy or is this non-interference strategy being adopted only to avoid any fallouts which may politically affect later. Unfortunately, a lot of politics is going on in the country these days while no one actually taking risk and ownership.


The rupee is so fragile against dollar that it is shedding value at a most alarming pace. It did show slight recovery for only two days in the last couple of months, on August 18/19, on President Musharraf's resignation. After two days, the rupee again reverted to worse performance. Between August 20 and 22 it lost more than four rupees. Moreover, record decline in the foreign exchange reserves due to import payments also put the economy in an alarming situation. Reserves held by the SBP declined to under US$ 10 billion from US$ 15 billion in February 2008. It is foolish to defend currencies without addressing the sources of instability in the real economy. Currency stability is a vital economic objective. At the level of the money economy, it makes the conduct of Monetary Policy easy. Monetary planning becomes simple, and interest rates less volatile. Central bankers adore currency stability. Presumably they hate turmoil in the currency market but they naively assume that the cause for the turmoil is the `market' and not the `currency' itself. So, they manage the market. To deal with the whole worrisome economic scenario, the SBP is continuously tightening fiscal policy. SBP's intervention to smoothen the money market volatility worked to some extent but results are not according to the expectations. The central bank's strict exchange policy measures have failed to stop the fall of rupee against dollar. Analysts said the major reason of this failure is the political uncertainty in the country.


The rupee is continuously depreciating against the dollar since the last eight months and the central bank's measures seem to have failed in arresting the slide especially in the inter-bank market. In May 2008 the State Bank of Pakistan imposed 35% Letter of Credit (L/C) margin on all imports except of oil and food imports aimed to narrow down the increasing trade deficit and to stabilize the rupee. On July 8, SBP took some other measures to strengthen the rupee and the central bank suspended the afternoon trading session by Banks Treasuries for all types of foreign exchange transactions. In line with these measures, the SBP also announced that it will now make 100% oil payments, besides suspending Forward Cover Facility (FCF) against imports and advance payments against imports with a cut to 25% with immediate effect to rationalize the foreign exchange market. In addition, the SBP instructed exchanges companies to close their NESTRO accounts and imposed a ban on the export of UAE Dirham and two other currencies by the exchange companies. And last but not the least, on August 28, SBP has also imposed 100% L/C margin on the import of over 386 luxury items with immediate effect to curb imports and stabilize the rupee. Apparently, the central bank takes such strict measure to narrow increasing trade deficit and reduce the rising demand of dollar.

With the imposition of LC margin, importers are required to make 100% payment of import at the time of LC opening and this step would compel the importers to reduce their imports due to liquidity constraints. SBP has imposed LC margin on luxury vehicles, shoes, phones, jewellery, electrical, home appliances, cooking appliances, arms and ammunition, furniture and lighting equipment, fruits, food preparations, vegetables, mineral or aerated water, cosmetics, cigars, cigarettes, tobacco, marble, soap, ceramics and other items. Earlier, 35% L/C margin was imposed on all imports except for oil and some selected food imports. However, later on June 21, on the request of the Federation of Chamber of commerce and Industry, SBP waived requirement of 35% cash margin on over 135 essential import items with a view to facilitating the trade and industry.

In short, Analysts say that the rising external current account deficit owing to widening trade deficit indicates that, despite a decent export performance, significant import demand pressures exist in the economy. While, on account of the continued political uncertainty, due to the increasing current account deficit, slow foreign inflows and the high oil import bill have also put pressure on the exchange rate. Official statistics revealed that the country faced a record 14.016 billion-dollar current account deficit during the last fiscal year 2008, as compared to 6.87 billion dollar in 2007. Net Foreign Investment declined by 38% during the last fiscal year due to massive outflows of portfolio investment because of political uncertainty and negative reports about the country's economy. Overall foreign investment stood at 5.193 billion in 2008 as compared to 8.42 billion dollar during the fiscal year 2007. At present, it is expected that some more measures for rupee appreciation be taken by the central bank, however the situation would not be improved until a sufficient supply chain is maintained along with political stability. Both the IMF and the World Bank had suggested to the economic team of Pakistan, which attended their board meeting held in Washington in May, to follow market-based approach for the rupee value. It is therefore, expected that demand for dollar is expected to further increase in the next few days and weeks. To narrow down the gap between imports and exports, measures have to be taken to improve quality of export goods. Besides, imports are allowed to cut cost of doing business in the country, but it appeared that measures should be taken to promote exports. In the meantime, exporters mainly the textile sector is still hoping that the Government may announce steps to promote exports. Lastly, it is important to understand that currency stability has far-reaching consequences on the economy. First, it smoothen production and consumption. Second, it supports capital investments and allocation. Currency stability gives long-distance vision to risk-takers. It supports even-handed allocation of capital. Third, it makes inflows of foreign direct investment less jerky. Therefore, prompt practical and collective corrective measures are the need of the day.


The State Bank of Pakistan and the SBP Banking Services Corporation will observe the following office timings during the Holy Month of Ramazan-ul-Mubarak:


Office Hours

Monday to Thursday & Saturday

8.30 A.M. to 1.45 P.M. (Without break)


8.30 A.M. to 12.30 P.M. (Without break)

The SBP Banking Services Corporation (Bank), Karachi will observe the following Business Hours and Clearing Timings on all working days during the Holy Month of Ramazan-ul-Mubarak:





2nd Special Clearing

From Monday to Saturday

8.30 A.M. to 12.00 Noon

8.30 A.M.

11.30 A.M.

After the Holy Month of Ramazan-ul-Mubarak, the pre-Ramazan timings will be effective.